TORM Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

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 9 Months and Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Field on your telephone keypad. Thank you. I would now like to turn the call over to Andreas of Bilgard Hein. Please go ahead.

Speaker 1

Welcome to TORM's conference call. We are pleased to have you with us. Today, we will present the results for the Q3 and 1st 9 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.

Speaker 1

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 field. Please turn to slide 2. Before we start presenting the results, I would like to draw your attention to our Safe Harbor statement.

Speaker 1

Please turn to slide 3. Today's presenters are as usual Executive Director and CEO, Jacob Elgarth and CFO, Kim Bely. PL. Please turn to slide 4. I will now hand over to Jacob.

Speaker 2

Well, thank you, Andreas, and good afternoon, good morning to all. Thank you for PL. Thank you for taking my questions. And we are pleased to present yet another quarter with healthy financial performance. Our results in the 1st 9 months of 2023 were historically strong despite temporary softness in the Q3, which was related to a decline in freight rates over the summer.

Speaker 2

We realized a TCE of US244 $1,000,000 in the 3rd quarter and an EBITDA of US178 $1,000,000 The decline in earnings in the 3rd quarter is, as I mentioned, the result of a temporary drop in freight rates over the summer across all vessel types. And while the product stocks in the Q3 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 8 vessels to 86 vessels in total over the past 12 months. TORM's Board of Directors has approved a dividend of US1.46 dollars per share based on our strong balance sheet corresponding to a payout ratio of 99%. The distribution is in line with our distribution policy.

Speaker 2

The product tanker market has in general remained strong but volatile here in the 3rd quarter and freight rates were negatively impacted by seasonal refinery maintenance and stock loss. 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 of this year at US38,822 dollars per day. In the Q3, we sold and delivered 1 MR vessel, which reduced the fleet to 86 vessels at the end of September. Yes. After the Q3, we've been active with respect to optimizing the seasonal, therefore, spend a few minutes on our recent trades.

Speaker 2

And here, Please turn to slide 5. As mentioned, we've been actively here in the 1st 9 months of the year. We acquired 10 vessels and divested 4 vessels in total. Now since the end of September, we have acquired 4 fuel efficient MR vessels built in 2015 2016. This deal will be financed by a 50% cash consideration of US75 $1,000,000 and 50% by issuance of 2,680,000 new shares based on the share price of US28 dollars Since the end of September, we have also acquired 8 LR2 vessels built in 2010 to 2012.

Speaker 2

This deal will be financed by a 60% cash consideration of US239 million dollars 40 percent by issuance of 5,500,000 new shares based on our share price of US30.72 dollars adjusted for the Q3 dividend of US1.46 dollars together with the 7 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 2 older PL. MR vessels and 1 Ola LR2 vessel.

Speaker 2

And now on a fully delivered basis, TORM will have a fleet of 93 vessels. Please turn to Slide 6. The purpose of our ONETORM 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.

Speaker 2

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, PL. The ONETORM 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 ONTARM platform also works on minimizing resource leakage by across the field field monitoring and information sharing.

Speaker 2

We constantly look for reducing the resources we spent both for the benefit of the environment and for lowering cost. 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 ONETORM platform will continue to optimize and Group while striving for best in class return on invested capital for the benefit of our shareholders. Please turn to Slide 7. Taking a look at the development in the product tanker market, here at the end of the Russia Ukraine war and the introduction of sanctions against Russia.

Speaker 2

We've seen a steep change in the forex tanker freight rates towards a higher average level as sanctions that led to a recalibration of trade flows towards longer distances. This has also brought along a higher volatility level as the product tanker field has moved closer to the point of full utilization, where even small changes in the underlying demand and supply field. 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.

Speaker 2

The impact of these has nevertheless been smaller and of temporary in 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 3, 4 months continuing to reshape the trade flows. Please turn to Slide 8. Let us take a closer look at the sanctions against Russia, which have been the main market driver for more than 1.5 years now. Since the EU field.

Speaker 2

Introduced sanctions against Russian oil products. The tonne mile associated with EU imports have increased by 41% as EU now predominantly imports from longer haul regions. And 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 field. Please turn to the next slide.

Speaker 2

Please turn to Slide 9. 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 stockpiling, 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 leased 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.

Speaker 2

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 start up 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.

Speaker 2

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 the final 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 Returning to export in 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.

Speaker 2

Please turn to Slide 11. Yes, when we look We will look at the supply side drivers and after years of subdued newbuilding activity, the product tanker ordering and shipyards has picked up this year and currently the order book stands at 11% of the fleet. It 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 3.5 years, translating into a 3% growth rate on an annualized basis. In fact, for the coming calendar year 2024, We expect fee growth at below 1%, which compares with an average growth of 4% per year for the past 10 years.

Speaker 2

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 18 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 newbuilding activity as largely concentrating around LR2 segment. But given the versatility of the LR2 fleet, We 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.

Speaker 2

Slide 12, please. To conclude my remarks here on the product tanker market, we expect the main demand PLT drivers on the product tanker market to continue to be supportive. The freight recalibration effect that has led to a step change towards higher freight rates has according to our calculations added 7 percentage points to the tonne 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 to 4 percentage points to the tonne mile over the past 7 quarters. At the same time, net fee growth has been limited to 2% per year, leading to the very positive demand supply growth balance we have experienced.

Speaker 2

With sanctions, again, Russia expected to remain in place, Coupled with low net fee growth, we do expect the market balance next year to stay positive. Now I'll hand it over to my colleague, Kim.

Speaker 3

Thank you, Jacob. Please turn to slide 13. Our earnings development during the Q3 of 2023 once again showed a strong performance and for the 1st 9 months of 2023 was the strongest in TORM's history. PL. TCE was US244 $1,000,000 in the 3rd quarter impacted by temporary lower freight rates over the summer.

Speaker 3

While the Q3 last year was exceptionally strong to the stock building prior to the implementation of Russian sanctions, this year we have had strong quarter despite stock loss. Our EBITDA for the Q3 was US178 $1,000,000 and included unrealized losses on FFA agreements of minus US8.4 million dollars After adjusting for this, our adjusted EBITDA was US187 million dollars and over the past quarters, we have achieved a total EBITDA of US881 $1,000,000 During the Q4, TORM has declared dividends of a total of US583 million dollars including the dividend announced earlier today, while also reducing our leverage and increasing the fleet from 78 to 86 versus 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 Q3 was $32,632 per day For ILAR-one, dollars 32,641 per day and for ILAR-two, dollars 35,054 per day. The average across the feed rate was US3310 dollars per day.

Speaker 3

Based on our rates and coverage for field. As of 6 November 2023, we had fixed a total of 64% of our earning days at $38,822 per day in the 4th quarter across the fleet. With the 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 Q4 compared to the Q3. Part of the mentioned coverage has been made with FFA contracts And during the Q3, TORM entered into 2 TCR contracts of 24 months each with rates of $43,000 per day. In the Q3, we had 7,658 earning days and we expect to have 7,494 earning days in the 4th quarter Based on the full effect of the vessel sold during the Q3 and taking into account that TORM East Mini, TORM Estri, TORM Kansas and TORM Pure and TORM Marina was sold and are expected to be delivered to the new owners in the Q4 and that our 4 MR vessels and 8 LR2 vessels were acquired and are expected to be delivered in the Q4 this year and the Q1 of next year.

Speaker 3

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 1st 9 months of this year, just as we have sold 2 vessels excluding the recent published transactions. This means that as of 30 September 2023, The value of the 86 vessels that we have

Speaker 2

in our fleet or we had in

Speaker 3

our fleet reached US3.55 billion dollars which is an increase of US421 $1,000,000 since the same time in 2022. The vessel value increase resulted in a net asset value of US2.5 billion dollars at the end of June at the end of the quarter, which is PL444 1,000,000 higher than the same time last year. Over the past 12 months, we have used a strong market to strengthen our financial position, while at the same time paying out a total of US583 million dollars 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 field.

Speaker 3

Taking a view of the status, TORM reached a level of 0.26 accidents PL. And while we always strive for 0 accidents, the level is below our 2,030 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, etcetera, TORM will focus even further on gender diversity and leadership to meet the 2,030 target of 35% of women in leadership in 2,030. In 2022, we also set our target to meet IMO's 2,030 target already in 2025.

Speaker 3

Field. In our most recent update, we have almost reached the target with a reduction of 39%. The ONETRUM platform will continue its efforts to be ahead of the curve. Segment. Please turn to Slide 17.

Speaker 3

Summing up, our results in the 1st 9 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 field 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 4th quarter, which is also evidenced by our coverage for the Q4 of 63% at US38,822 dollars 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 $7,501 per share over the past 4 quarters. All in all, our Delivered results confirm that TORM's operating model consistently performed strongly also compared to peers, resulting in a superior return on invested capital and a high dividend payout.

Speaker 3

We attribute this to our ONTARM platform and our dedicated TORM employees. With that, we will let the operator open for questions.

Operator

Your first question comes from the line of John Chappell with Evercore. Please go ahead.

Speaker 4

Thank you. Good afternoon. Jacob, I want to start with Slide 9, because I think it's probably the most important part for the next few months at least. We've been noticing the same from an inventory drawdown perspective. And I think maybe some people forget the Russian sanctions didn't kick in until February 5 PL, which means that Europe had exposure to Russian diesel all through last winter and took advantage of that as you noted.

Speaker 4

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 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?

Speaker 2

Thanks, Jan. Jacob here. So no, I actually don't think that we have started to see anything noticeable about creating or having this sensibility. I think we as a company believe that it is that it would be like field team from sort of energy security and just the fact that you really, I think as a society, we 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 people are starting to stockpile because, of course, the lead time of any further draws, the need time to fill up is different this year than what you could expect last year.

Speaker 2

Just simply from a logistical point of view. So but I don't think we've seen it yet. It's going to be very, very interesting to PL. Over the next couple of weeks 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 months, but we have not seen it yet.

Speaker 4

Okay. Yes, that's good to understand. And also the reaching out proactively and the time to get it there field. Also means that once it starts, it sounds like the momentum would be pretty strong. Just from a corporate perspective, field.

Speaker 4

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, 2010 to 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 as you mentioned in your one TORM strategy, The willingness of charters to continue to use ships that are at 15 years or older.

Speaker 2

Yes. So what we are experiencing is that especially for the larger vessels that that asset class in general have a longer production life because you can switch between clean and crude as the vessels field H. So we are very comfortable with the assets that we have acquired. We'll actually be meaningful contributing to the platform for a considerable number of year and do not see for this particular asset a 15 year as a particular interesting point for these assets.

Speaker 4

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

Speaker 2

You're welcome.

Operator

Our next question comes from Benoit Nytingnis from Clarksons Securities. Please go ahead.

Speaker 5

Thank you. I just wanted to touch on contact coverage. You entered into a couple of 2 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 trackers to be confident in entering them?

Speaker 2

Yes. Benoit, 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 up, these are assets where we think that the rates we obtained PL. 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.

Speaker 2

We don't have a particular PL. Wish for a balance between spot and period we believe in the market. Because when and if there are opportunities like the one that you mentioned here, Then we will be constructive to look at that. 1 of the vessels that we have acquired have a similar term contract attached. So we'll have at least then we'll have 3 which are very much in line and similar.

Speaker 2

So I think it will depend on how the market evolves. When and if turn 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.

Speaker 5

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 target fleet types?

Speaker 2

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 7 vessels this year. And then we have the flexibility to also look at incremental acquisitions where our preference is for the PL. So I think it would be rather opportunistic that you will see us uploading assets as they sort of on our platform is coming to the end of their useful life. And at the same time, we are happy to engage in dialogue field on vessels transactions that are in the sort of in the sweet spot that we think which is the structure itself field.

Speaker 2

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.

Speaker 5

Perfect. That's good color. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 1

Thank you. We have a couple of questions from the webcast, one for you, Jacob. Field. Oaktree attempted to bring down their share in TORM in March this year. Can you comment on the wish to reduce their stake in TORM and field.

Speaker 2

Yes. So I think it's a good 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 you will I will unfortunately pass on that. You need to direct it to the shareholders.

Speaker 1

And Judah, we have a question for You can comment on how

Speaker 2

you will

Speaker 1

finance the MR and LR2 acquisitions made recently?

Speaker 3

Yes, I will do that. Thank you for the question on the 4 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 ALR2s, it will be We have full commercial support from our core banks to the deal and we know that at least 3 of them will be financed field to a bank and the others we are considering bank financing or alternatives, but that is to be decided.

Speaker 1

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

Speaker 3

Yes. Thanks 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 5.

Speaker 3

By the end of the Q3, we on the distribution, you can see we have US74.5 million dollars in EMEA proceeds. And in the Note 10, we have described and when we take all these transactions into account, we will have US184 $1,000,000 in EMR proceeds. I hope that answers your question in regards to the amount proceeds.

Speaker 1

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

Speaker 2

Yes, I can take a stab at that. So our distribution policy field. It's very clear and you've seen the results of that over the last quarters. There is currently no ambition to change that. So that means that Dividends would then be deriving from the operational cash flow and that once you have a certain threshold of cash on account, then we will be dividending or distributing the balance out.

Speaker 2

And on leverage, We are comfortable with the current levels. We think we can even increase leverage A little in the current environment, but basically you should expect more of the same.

Speaker 1

Thank you. We have no further questions. So this concludes the earnings conference call regarding the results for the Q3 and 1st 9 months of 2023. Thank you for participating.

Powered by Quartr

Key Takeaways

  • TORM delivered historically strong 9M 2023 results with Q3 freight‐rate volatility driving a Q3 EBITDA of US$178 million and robust TCE metrics despite seasonal softness.
  • The fleet expanded from 78 to 93 vessels through net acquisitions of 15 MR/LR units, boosting available earning days by 9% to 7,658 in Q3 and enhancing operational capacity.
  • The Board approved a dividend of US$1.46 per share (99% payout ratio), underscoring a strong balance sheet and adherence to TORM’s distribution policy.
  • Market fundamentals remain supportive: 64% of Q4 2023 earning days are hedged at US$38,822/day, underpinned by winter stock replenishment, sanction-driven trade recalibration, refinery dislocations and limited fleet growth (~1% annualised).
  • TORM’s ONETORM platform integrates commercial and technical management to ensure high vessel quality, safety and resource efficiency, driving superior returns on invested capital.
A.I. generated. May contain errors.
Earnings Conference Call
TORM Q3 2023
00:00 / 00:00