Torm Q1 2024 Earnings Call Transcript

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May 8, 2024

Key Takeaways

  • In Q1 2024 TORM delivered a strong financial performance with TCE of $331 million, EBITDA of $266 million and net profit of $209 million (adjusted net profit $192 million, up 25% year-on-year).
  • Market fundamentals remain robust as global demand for refined products grows, fleet additions stay limited, and ton-mile demand has been boosted by rerouting around the Red Sea and sanctions-driven trade flows.
  • TORM’s fleet now stands at 89 vessels after selling an older MR tanker and adding second-hand tonnage, increasing its exposure to the long-haul segment.
  • The Board declared a $1.50 per share dividend for Q1, representing 73% of adjusted profit and reflecting the company’s balance between growth investment and shareholder returns.
  • TORM upgraded its Q2 outlook to TCE earnings of $1.1 billion–$1.35 billion and EBITDA of $800 million–$1.05 billion, with 42% of 2024 days already fixed at $43,189 per day amid expectations of continued volatility and longer voyage distances.
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Earnings Conference Call
Torm Q1 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TORM First Quarter 2024 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. As a reminder, today's call is being recorded. I will now hand today's call over to Michael Larsen.

Operator

Please go ahead.

Speaker 1

Thank you for joining us today, and welcome to the TORM Q1 of 2024 earnings conference call. On the call with me today are as usual, Jacob Mogul, our CEO and Executive Director and Kim Mele, our CFO. This morning, we released our company announcement for our results for Q1 of the year. Information discussed in this call is based on information as of today and may include forward looking statements that involve risk and uncertainty. Thus, as always, I would like to draw your attention to the Safe Harbor statement on Slide 2.

Speaker 1

Today's call will be recorded and available for replay later at our website, tron.com. As usual, we will start with a short presentation followed by a Q and A session where we will be happy to answer any questions that you may have for us. And now, I'd like to introduce our CEO, Jacob Melco, who will kick off on Slide 4.

Speaker 2

Well, thank you, Michael. And of course, thank you everybody for joining us on our call today. I am pleased to report that again this quarter TORM achieved a strong financial performance with TCE of US3 $31,000,000 and an EBITDA of $266,000,000 The fundamentals that have been supporting the positive rate environment for some time now, it does remain intact and thus we continue to see increased global demand for transportation of refined oil products and similarly only limited fleet growth. In addition, attacks in the Red Sea have led to rerouting of vessels and thereby added further to the ton mile demand. Over the course of the previous quarters, we have both acquired additional secondhand vessels and divested some of our oldest vessels and thereby both renewing and adding to our total fleet capacity.

Speaker 2

In the Q1, we had divested one of our older MR vessels and after delivering this to the new owners, we will have a fleet size of 89 vessels. Thus, we have increased the size of our fleet compared to the same quarter last year. And on top of this, we have increased our exposure to the long haul segment. Further, on a separate note, I would like to draw your attention to the strength of the current market. Here in April, we have obtained a 3 year time charter at $30,000 for a 2012 build MR, and we have divested a 2,006 build MR for US22 $1,000,000 Both transactions underlying that there is a strong demand in the market.

Speaker 2

Ultimately, we believe this will put us in a strong position for further adding to our value creation over the coming years. And not forgetting our shareholders based on the profit and a very strong cash generation from our business, we have to date declared a dividend for the quarter of $1.50 per share, thus adding to the positive dividend flow seen over the recent quarters. Again, I believe that we have found the right balance between investing in growth and rewarding our shareholders. So here, kindly turn to Slide 5. So in the past 2 years, the product tanker market has seen great volatility, mainly driven by geopolitical tensions in Europe and the Middle East.

Speaker 2

On top of supporting fundamental market drivers, these geopolitical factors have increased product tanker rates to new higher average levels. Please turn to Slide 6. And in essence, the geopolitical tensions that we have seen in the past 2 years, 1st in Europe and lately in the Middle East, have reshaped product tanker trade flows towards longer distances. All while, overall trade volumes have risen, supported by increasing oil demand and changes in refinery landscape. The sanctions against Russia that were officially introduced in early 2023 led to a trade rerouting towards longer haul trade for both European imports, but also for Russian exports.

Speaker 2

And lately, we have witnessed an increased willingness in the EU to up the game on sanctions on Russia, including on Russian oil and potentially gas exports. This year, the product tanker market has been strongly affected by the Houthi attacks against commercial vessels at the Bab el Mande Strait. The attacks have similarly led to trade being redirected towards longer trading distances. Recent geopolitical events have shown that the disruptions in the product tanker market can be longer lived than initially thought and it may take longer time before the Red Sea is deemed safe for transit. While the Red Sea situation is very dynamic, the escalation of the conflict between Iran and Israel suggests that the timeline for disruption continues to be drawn out.

Speaker 2

Now please turn to Slide 7 for a closer look at the market developments here in the Q1 of 2024. In the Q1 of this year, trade volumes with refined oil products have increased by 4% compared to the same quarter last year, supported by strong market fundamentals. On top of generally higher trade volumes, also trading distances have become longer. The share of global clean petroleum product trade transiting the Suez Canal has declined from 12% to only 4%, meaning 8% of the global trade has been redirected with majority of this going a longer route around of Cape of Good Hope instead. This has led to an overall increase in ton mile demand for product tankers.

Speaker 2

So far here in the Q2 of the year, trade volumes have followed a seasonally weaker trend, yet volumes continue to travel longer. For the rest of this year, TORM expects both seasonality and volatility with continued market disruptions, keeping trade distances longer. And now here, I'll kindly ask you to turn to the next slide to Slide 8, please. Let me also touch upon the more fundamental market drivers. In recent years, new refining capacity has been added in net exporting regions such as the Middle East.

Speaker 2

On the other hand, a number of refineries have been closed in net importing regions. This has led to higher trade volumes and higher demand for product tankers. Some of this effect is yet to come. A good example here is new refineries in the Middle East where full impact on the region's refinery runs is first expected in the second half of this year. This will boost the region's export with a portion of this likely to travel around the Capel Good Hook supporting further ton mile development.

Speaker 2

An exception to this positive refinery dislocation story is the Angola refinery in Nigeria, which will potentially replace the country's gasoline import with domestic supply. After some delays, the refinery has started initial runs. And to the contrary of expectations, we have seen in this ramp up phase emerging exports of naphtha and gas oil from the refinery going to Europe, Far East and Brazil. We nevertheless export expect sometime before the refinery reaches full capacity. Its future gasoline production is set to stay in the domestic market, while a fair share of its distillate supply may cater for the shortages in the wider West African region.

Speaker 2

If we look further into the future, we believe that the refinery dislocation story might not be over yet. The risk of refinery closures in some of the main imports and regions is still quite high. Already mentioned, Angola Refinery, for example, is likely to put further pressure on the European refinery sector as West Africa is today one of the main markets for European gasoline. Any potential capacity rationalization in Europe could in turn increase the need for diesel imports. Please turn to Slide 9 for an update on the supply drivers.

Speaker 2

And here after years of subdued newbuilding activity, product tanker ordering at TPRs has picked up and currently the order book stands at 15% of the fleet. This is up 3 percentage points since last quarter. However, what is important to mention here is that the current order book is spread across 4 years, translating into a 3% to 4% growth rate on an annualized basis. Despite increased ordering, our long term view on the tonnage supply remains unchanged. If we look at the share of fleet at above 20 years old, which are the candidates for scrapping within the next 5 years, we see that the fleet growth will be relatively balanced.

Speaker 2

The 18% increase means that the net fee growth could even turn negative in the second half of this decade. Should a strong freight market result in less than expected scrapping activity, we still expect older vessels to leave the mainstream market and go into sanctioned or into capitalized trades. As we have pointed to earlier, newbuilding activity has largely concentrated 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 14%, which compares with 16% of the combined fleet being candidates for recycling.

Speaker 2

And now please turn to the next slide, please turn to Slide 10. And to conclude these remarks on the product tanker mine, we expect the main demand and supply drivers on the product tanker market to continue to be supported. The global product tanker demand in terms of tonne mile increased last year by 8%, mainly driven by trade recalibration due to sanctions against Russia. We estimate that the Red Sea disruption can add a further 5% to tonne mile with an additional upside from potentially longer balance patterns via the Cape route. On the other hand, net fleet growth is much more limited.

Speaker 2

Last year, we saw a large number of LR2 vessels moving into the dirty market. So far this year, we've seen an increased number of LR2s cleaning up, but even in case of a potential large scale net migration back to the clean trade, our calculations show that the product tanker demand supply balance will remain at a much firmer footing than before the geopolitical tension started. Now with these comments, I'll now conclude my part of the presentation. I'll hand it over to my colleague, Kim, who will walk us through the financials.

Speaker 3

Thank you, Jacob. Please turn to Slide 11 for the financial highlights. In the Q1 of the year, our TCE increased to US331 $1,000,000 and based on this, we generated US266 $1,000,000 EBITDA and US209 $1,000,000 in net profit, Subtracting profit from sale of vessels of US17 $1,000,000 we derived at a satisfactory adjusted net profit of US192 million dollars dollars I. E. Up 25% relative to last year driven by both the strong rate environment and our increased fleet that have added to our earnings days.

Speaker 3

TORM achieved TCE rates of more than $43,000 per day with LR2s above $54,000 a day, LR1s above $48,000 a day and MRs around $39,000 a day, driven by a very high level of rates in the first part of the quarter followed by summary tracking towards the end of the quarter. Our fleet had a total of CAD 7,000 698 earning days, I. E. Markedly higher than the 6,732 days we had in the same quarter last year as we took delivery of more vessels. We believe these are strong numbers and added together they reflect a very strong performance enabling us to increase TCE rates per day by $1400 compared to Q1 2023 while maintaining operating expenses unchanged just below CAD7300 per day.

Speaker 3

Also, our continuous focus on capital management and balance sheet structure is reflected in a stable loan to value ratio in the range of 25% to 30%. As seen in previous quarters, we have achieved a stable level whilst increasing our operational level as we are using our shares as part of the consideration in connection with acquisition of vessels and at the same time allowing us to return a significant part of our earnings to our shareholders. Please turn to Slide 12. The chart in the upper left illustrates how vessel values have developed over the previous quarters leading to a total value of US3.5 billion dollars at the end of Q1, 2024 and with net asset value showing a similar compression. On the chart in the lower left, we have adjusted the net interest bearing debt for the dividend for Q4 2023, I.

Speaker 3

E. The dividend distributed in this April and thus getting to US885 $1,000,000 In total, we have like for like increased the net interest bearing debt by US238 $1,000,000 over the course of the year, whilst vessel values have increased around US600 $1,000,000 This gets us to the net loan to value ratio of 25.6%. Now please turn to Slide 13. I have already touched upon our strong cash return to shareholders. So this slide is just to sum it up.

Speaker 3

Our net profit for the quarter amounted to US209 $1,000,000 whereas US17 $1,000,000 stems from the profit from sale of business, I. E. Adjusted profit for the quarter amounts to US192 $1,000,000 Based on our distribution policy that states our intention to pay out excess liquidity above a threshold cash level, the Board of Directors have declared a dividend for Q1 2024 of $1.5 per share, I. E. Adding to the string of attractive cash distributions we have made in the previous quarters.

Speaker 3

This adds up to just around US141 $1,000,000 corresponding to 73 percent of our adjusted profit and as such, it reflects the transparent cash flow from operations, less installments on debt. And now please turn to Slide 15 for the outlook. Based on the very satisfactory results we have published today and our coverage we have for the Q2 of 2024, updated our guidance range to TCE earnings in the range of US1.1 billion dollars to US1.35 billion dollars and EBITDA in the range of US800 million dollars to US1.50 billion dollars Thus, we have increased the lower end of our range by US100 $1,000,000 and thereby narrowed the guidance range compared to 2 months ago, thus adding further comfort to our full year guidance. As you might expect, we have planned for standard maintenance to be done over the summer months, thus drydockings and therefore the number of off hire days will be a little higher in Q2 and Q3 compared to Q1. Thus in the Q2 of 2024, we have we expect to have 7,763 earning days and for the full year, we would expect to have 31,225 earning days.

Speaker 3

Based on our rates and our coverage as of 6 May 2024, we have fixed a total of 42% of our earning days at $43,189 per day for the full year across the fleet. And this concludes my part of the presentation. So I will now hand it back to the operator who will take care

Speaker 2

of the Q and A session. Thank you very much.

Operator

Thank you. Your first question is from the line of Jon Chappell with Evercore.

Speaker 4

Thank you. Good afternoon. I just want to ask 2 questions as it relates to strategy and basically just quarterly updates on things we've spoken about in the past. First, as it relates to the fleet, obviously you've absorbed a fair amount of secondhand vessels over the last 12 to 18 months and asset values keep pushing higher. You've also been divesting some of your older vessels.

Speaker 4

Where do you kind of see yourself on additions versus subtractions going forward in the current, not just rate backdrop, but asset value backdrop?

Speaker 2

Yes. So it's of course, thanks, John. Jacob here. It's a dynamic world. I mean, so as you point to, we were relatively active.

Speaker 2

Last year, we saw quite a number of opportunities that we felt were compelling to enter into is basically for larger ships, LR2, LR1. Prices have kept pushing up even after those transactions. So I think we've been a little in a pause moment, to be honest. You can also see this year so far, we've added 1 vessel to our fleet and we'll take 1 out. So it's been relatively stable.

Speaker 2

Having said that, we are constantly scouting for what we would deem as good capital employment with a good risk reward. But I don't have anything on the table right now, John, where I could say that's compelling. But surely, with, I would say, an organization that is keen to still deliver even more value and not rest on the laurels, we are certainly chopping away on the opportunities. But there's nothing where I could say that makes sense. But I'm hopeful that we'll do something.

Speaker 2

Right now, I'm very comfortable with the decision we had to be honest.

Speaker 4

Great. That's good to hear. You noted in your initial comments, which I didn't see in print anywhere, you did a 3 year contract. As we think about this order book as it continues to build and a lot of the wind at your back from a demand and geopolitical perspective, Have you thought now with that fleet of 89 vessels that you're comfortable with, maybe getting a little bit more coverage, some duration of 3 years? And I guess the follow-up to that would also be, was this that you were able to sign somewhat of a one off or is there increasing liquidity in that market?

Speaker 2

Okay. So let's start from the back end. I do think that given that we are now in effect, if we look at our own numbers, we are 2 years into strong earnings. I think it's also clear that the geopolitical environment that I discussed before, obviously, we don't know the future, but it looks as if it is supportive of longer ton miles for transportation we'll find oil. I think there are starting to be signs of that some of our clients also think that maybe they should hedge themselves against a continued very, very strong market.

Speaker 2

And obviously, if we do longer dated contracts, I mean, I just mentioned 30,000 on an MR that dwarfs us when we are doing more than 40,000 on a quarterly basis right now. So I think my answer to the latter part of your question would be, I do think there is more people looking at would it make sense now to start to derisk if you are long on freight and not long on ships. And we will constantly, of course, cut for that type of opportunity with the right clients. And yes, we are seeing we are in a more dialogue on that today than what I experienced, let's say, a couple of quarters ago.

Speaker 4

Got it. Great. Thank you, Jacob.

Speaker 2

Thanks. Thanks for your questions.

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