TORM Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 4 speakers on the call.

Operator

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.

Operator

After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Jacob Meldgaard, Chief Executive Officer. Please go ahead.

Speaker 1

Thank you and a warm welcome to everyone joining us on the call today. This morning, we released our Q3 results and I'm pleased to share that TORM 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 US263 $1,000,000 and EBITDA amounted to US191 $1,000,000 although freight 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.

Speaker 1

These factors have resulted in vessel rerouting, longer voyages and higher ton mile demand contributing to a tight supply demand balance in the product tanker 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 Suezmaxes 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 prior year back in August, we acquired 8 secondhand MR vessels for US340 $1,000,000 in a partly share based transaction. These vessels built at Jundal Mipro dockyard between 2014 and 2015 are part of our ongoing program to replenish our fleet and so far we've taken delivery of 6 of the vessels and are expected to take over the remaining 2 before the end of the year.

Speaker 1

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 US1.20 dollars per share for the quarter adding to the strong dividend flow seen in recent periods. Now please turn to Slide 4. Now for almost 3 years, geopolitical tensions first in Europe and since then in the Middle East has driven product tanker rates to a new higher average level. At the same time, we've also seen increased volatility in rates as fleet utilization has moved closer to full utilization.

Speaker 1

However, in recent months, we've seen decline in rates as short term factors such as intensified crude tanker cannibalization have softened the positive impact from geopolitical factors. And you kindly turn to the next slide, turn to Slide 5. 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 tanker market has been strongly affected by the Houthi attacks against commercial vessels at the Bak el Mande Strait.

Speaker 1

The share of global clean petroleum products 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 6. 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 mile demand. Actual loaded volumes have though been trending down over recent months and fell to be low a year ago levels here in October.

Speaker 1

One of the reasons 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 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 7. The 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 Suezmaxes since the end of Q2.

Speaker 1

These accounted for 9% to 10% of the clean petroleum product ton mile here in the Q3, offsetting a large part of the incremental ton miles. However, 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 1st month of Q4, but also in the stark decline in the volume of team 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 4th quarter. Please turn to Slide 8.

Speaker 1

On the tonnage supply side, we've seen an increase in newbuilding activity this year with the order book currently standing at 22% of the fleet. As we pointed out earlier, newbuilding 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 feed being candidates for scrapping. The safest trend is seen in the entire product center fleet.

Speaker 1

In fact, the average age of the fleet has not been as high as it is today in 2 decades. With 14% of the fleet above 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 2 years, we still expect older vessels to leave the mainstream market and go into sanctioned or capitalized 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.

Speaker 1

Now, please turn to the next slide. Please turn to Slide 9. Looking further ahead in time, we expect the product tanker delivery from 20 28 onwards to be much lower than what we are going to see for the next 3 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.

Speaker 1

Please turn to Slide 10. And 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.

Speaker 1

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 closer 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 U.

Speaker 1

S. Oil industry and with potentially stricter sanctions against Iran that would be a supportive factor for the crude tanker market. It remains obviously to be seen, but we expect U. S. Oil imports to be shielded from potential tariffs in order to keep gasoline prices under control.

Speaker 1

On the geopolitical landscape, Trump is likely to push for a final resolution of the Ukraine Russia war. However, the prospects for success from 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. Now, with this conference, I conclude my part of the presentation.

Speaker 1

I'll hand it over to my colleague, Kim, who will walk us through the financials.

Speaker 2

Thank you, Jacob. Now please turn to Slide 11 for the financial highlights. In the Q3, TCE amounted to US263 million dollars and based on this we achieved US191 million dollars in EBITDA and US131 million dollars in net profit, I. E. Slightly up compared to same quarter last year.

Speaker 2

Fleet wide, our average TCE rates were close to US34000 dollars per day while LR2 is pulling in close to US41000 dollars LR1 set over US33000 dollars and MRs at more than US31000 dollars dollars 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 ton 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 US700 dollars compared to Q3 2023. Moreover, our return on invested capital amounted to 20.3% demonstrated a very healthy business environment in the Q3. Once again, our business is developing substantially profit and cash flow and we are committed to continue our practice of returning a significant portion of these earnings to our shareholders.

Speaker 2

Now please turn to Slide 12. The chart in the upper left corner show how vessel values have steadily risen over recent quarters bringing the total value of up to US3.9 billion dollars 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 have highlighted the trend in our net interest bearing debt, which now stands at US825 $1,000,000 I. E. Flat relative to the same quarter last year despite the fleet expansion that we have made.

Speaker 2

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.

Speaker 2

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 derive 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 November and for the shares on NASDAQ New York on the 21st 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 results we have published today and the coverage we have for the Q4 of 2024, we have close to full visibility for the year.

Speaker 2

The table shows that we in the Q4 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 US29,044 dollars per day. Compared to the current spot rates, this reflects, this is relatively high, thus if you assume that TORM will achieve rates in line with the current spot rates for the remaining part of the quarter, then the fleet rate fleet wide rates 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 US37,124 dollars per day, I. E.

Speaker 2

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, 3 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 US1.11 billion dollars to US1.16 billion dollars and EBITDA of $810,000,000 to $860,000,000 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 when they arise.

Speaker 2

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 enabled us to be more agile and responsive to market conditions, focusing on investments that generate higher returns. We have successfully enhanced our original leverage allowing us to capitalize on favorable market dynamics in the previous quarters. Leveraging these dynamics allow us to optimize performance and stay competitive.

Speaker 2

We have 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.

Speaker 2

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 and A session. Thank you.

Operator

Thank you. We'll take our first question from Emily Harkins at Jefferies.

Speaker 3

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 VLCCs and Suezmaxes 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?

Speaker 1

Yes. Good morning, Emily. Thanks for bringing up that. So I think we tried to illustrate also 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 Q4, there is no over and above utilization of crude tankers in the CP, CPP trade from what we would normally experience.

Speaker 1

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 for 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.

Speaker 1

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 to refinery outages and refinery maintenance.

Speaker 3

Thank you so much. And as a follow-up, you tended to be active with fleet renewal on an ongoing basis, including the AMRs 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 see approach given the softer market now?

Speaker 1

I think it's clear that the buyers and sellers in a market where we're sort of reestablishing where we 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 are staying agile. We could do either or. We could be in dialogue potentially on acquiring in a share based cash share based transaction for the assets, but we could also potentially of course look at letting go and selling of assets.

Speaker 1

Currently, there's no specific plans around this, Emily.

Speaker 3

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

Speaker 1

Thanks.

Operator

We'll go next to Mandeep Poldenningens at Clarksons Securities AS.

Speaker 1

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

Speaker 1

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.

Speaker 3

Okay. Thank you.

Speaker 2

That's good to hear. I will return to the queue.

Speaker 1

Thank you.

Speaker 3

And we do have

Operator

a follow-up from Emily Harkins at Jefferies. And Ms. Harkins, your line is open. Please go ahead.

Speaker 3

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

Operator

Okay. Thank you. And no further questions. That concludes our Q and A session. I will now turn the conference back over to Jacob for closing remarks.

Speaker 1

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

Operator

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

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TORM Q3 2024
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