TORM Q2 2024 Earnings Call Transcript

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August 15, 2024

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the TORM First 6 Months and Second Quarter 2024 Results Call. Please note that today's call is being recorded. 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

Thank you. I will now turn the call over to Jacob Milgard, CEO. Please go ahead, sir.

Speaker 1

Thank you, and thank you, everybody, for joining us on this call today. This morning, we released our company announcement with the results for the Q2 of the year. And I'm pleased to report that again, this quarter TORM has achieved a strong financial performance. Our time charter equivalent earnings increased to US326 million dollars and EBITDA improved to US251 million dollars as freight rates remained firm throughout most of the quarter. Again, we had witnessed a continuation of the market dynamics that we've seen in the previous quarters, I.

Speaker 1

E, geopolitical tension stemming from both the Ukraine and Russian conflict and the escalating confrontations in the Middle East that leads to rerouting of vessels, longer voyages and higher ton mile demand. This, of course, adds to an already tight supply demand balance in the product tanker market. We remain optimistic about the prospects for the coming years as we believe that the supportive fundamentals for the positive rate environment is likely to stay intact. Thus, we expect longer ton mile, higher utilization rates in the years to come and at the same time manageable newbuilding deliveries. Consequently and in line with what you have seen in previous quarters, in early July, we entered into an agreement to acquire additional secondhand vessels.

Speaker 1

This time, 8 MR vessels to be delivered during the second half of this year for a total consideration of US340 million dollars The vessels have all built at Hyundai Amipo Dockyard in 2014, 2015, and 6 of the vessels have been fitted with scrubbers. And then as you would expect us to do when our vessels reach a certain age, we have divested 12,006 built MR Tanker for delivery in the Q3 2024 for cash consideration of USD 23,300,000 Thus, adding it all together, we are both expanding and replenishing our fleet. And as we've done for some time now, we are using our partner share based structure to finance the transaction. By continuing this way forward, we believe that TORM will be in a strong position to further add to our value creation over the coming years. All in all, this has been a very satisfactory quarter and in line with our intention of distributing the cash flow net of debt repayment.

Speaker 1

TORM has declared a dividend for the quarter of US1.80 dollars per share, thus adding to the positive dividend load seen over the recent quarters. And here, please turn to Slide 5. In the past two and a half years, geopolitical tensions, first in Europe, then in the Middle East, have led to the product tanker rates increasing to a new higher average level. At the same time, we are also seeing increased volatility in rates as the fleet utilization has moved closer to full utilization. Please turn to Slide 8.

Speaker 1

The main impact of this view of these geopoliticalizations has been a reshaped product tanker trade towards longer distances. All while, overall trade volumes have risen, supported by increasing oil demand and changing in refinery landscape. The EU 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 Bap En Malte Strait. The share of global clean petroleum products trade transiting the Suez Canal has declined from 12% to only 4%, meaning 8% of the global trade has been redirected.

Speaker 1

The majority of this is going a longer route around the Cape of Good Hope. While the Middle East situation is very dynamic, the recent escalation of the conflict between Iran and Israel suggests that the time line for disruption continues to be drawn out. Now please turn to Slide 7 for a closer look at the market development here in the Q2 of the year. In the Q2 of the year, trade volumes with refined oil products increased by 2% compared to the same quarter last year, supported by higher oil demand and recent changes in the refinery landscape. Together with the longer trading businesses, this has led to an overall increase in short mile demand for product tankers.

Speaker 1

At the same time, earnings for our larger crude tankers have been subdued both seasonally, but also given the fact that VLCCs have not directly benefited from geopolitical drivers. This has led to a cleanup of a number of VLCCs and Suezmaxes since the end of the second quarter. However, as we move towards the Q4, TORM expects a seasonally improving crude tanker market to significantly reduce incentives for crude cannibalization at the same time as both seasonality and volatility with continued market disruptions will keep clean trade distances longer. Please turn to Slide 8. When we combine the tonnage demand and supply drivers, our calculations show that the product tanker demand supply balance has stayed on a much firmer footing than before the geopolitical tension started.

Speaker 1

After an 8% increase in ton miles last year, the Red Sea disruption together with organic growth in trade volumes has so far this year added around 10% to ton miles. This has been front loaded, but actually more than what we had forecasted. What is important to mention here is that tonne mile has grown significantly also on trade not directly related to the Red Sea disruption. At the same time, net fleet growth has been much more limited. The cleanups of both LR2s as well as large crude carriers have increased the supply of tonnage, but even with this, the supply growth has been much more limited than the growth in ton miles.

Speaker 1

Please turn to Slide 9. The product tanker ordering at shipyards has picked up after years of subdued newbuilding activity. Currently, the order book stands at 19% of the fleet. As we have 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.

Speaker 1

The combined order book is currently at 17%, which is equal to the share of the combined fee being candidates for recycling. Furthermore, it's important to mention that the current order book is spread over 4 years and with the increasing average delivery time, vessels order today will most likely not be delivered before 2028. And I'll kindly turn to the next slide, turn to Slide 10. When we look further ahead in time, we now expect the potential additional order bring off the product tankers from 20 28 onwards to be lower than our previous forecast. This is predominantly due to Chinese suppliers opting to build container vessels, LNG carriers and other vessel segments where China has strategic import interests.

Speaker 1

This coincides with a period where an increasing share of the fleet reaches a natural scrapping age. 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 sanctions or cover for us trades. Please turn to Slide 11. Lastly, behind the geopolitical factors that have reshaped refined product industry, there is a refining industry influx. In recent years, new refining capacity has been added in net exporting regions such as the Middle East.

Speaker 1

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. Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling 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 refineries that are more open to international trade than in other regions.

Speaker 1

A new wave of refinery closures is likely to again increase trade with refined products. Now with these comments, I conclude my part of the presentation. 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 12 for the financial highlights. In the Q2 of the year, our time charter equivalent earnings increased to US326 $1,000,000 and based on this, we achieved US251 $1,000,000 in EBITDA and US194 $1,000,000 in net profits. When we adjust for the unrealized gains on derivatives in Q2 2023, the operating result is around 30% year on year, up around 30% year on year driven by both the firm freight rate environment and increased relative share of LR2s in our fleet. TORM achieved fleet wide TCE rates of more than $42,000 per day with LR2s close to $52,000 per day, LR1s at more than $42,000 and MRs at more than 38,000.

Speaker 2

It should be noted that spot rates were at a relative high level in the 1st part of the quarter followed by some retreating towards the end of the quarter as season disrupting started. Our fleet had a total of 7,749 earning days, I. E, a little higher than the 7,451 days we had in the same quarter last year. However, as previously mentioned, with LR2s accounting for relatively higher part of the total compared to last year. We believe these are strong numbers and altogether they reflect a very satisfactory performance enabling us to realize TCE rates per day that have increased by $5,700 compared to Q2 2023.

Speaker 2

Further, the results that we have produced translate into a return on invested capital of 29.5%, thus underscoring the positive environment in which we are operating. And as highlighted previously, you should expect us to maintain a stable and conservative financial leverage also in periods where we are increasing our operational leverage as we are using our shares as part of the consideration in connection with acquisitions of business. Again, this quarter, our business is generating significant profit and cash flow. And again, we remain firmly committed to returning a significant part of our earnings to our shareholders. Slide 13 please.

Speaker 2

The chart in the upper left illustrates how vessel values have increased over the previous quarters leading to a total value of US3.7 billion dollars and net asset value showing a similar progression, reflecting higher broker valuations of the vessels as well as an increased fleet. Also on this slide, we show in the chart in the lower left corner, the developed in our net interest bearing debt, which now amounts to US137 $1,000,000 that was US157 $1,000,000 lower than a year ago. As we have increased our cash position somewhat and thereby more than offset an increase in our gross debt. Based on this, we currently stand at a net loan to value ratio of 20.4 percent. However, when subtracting the dividend for Q2, then it would be around 25%, but continuing the quarter by quarter decline in financial leverage.

Speaker 2

Slide 14 please. On this slide, we have made an overview of per share development in recent quarters. The result we announced today translate into an EPS of $2.08 significantly higher than the same quarter last year. Share count has increased by 10,000,000,000 shares over the period since last year driven by our party share based transactions and is up from 84.9 to 94.9 over the same period. Based on our strong earnings, the Board of Directors has declared a Q2, 2024 dividend of $2.8 per share, thus, offering the dividend by $0.30 per share compared to same quarter last year.

Speaker 2

And now please turn to Slide 15. These slides give you the full overview of the dividend distribution and the key dates to observe. Ex dividend date for the shares on NASDAQ Copenhagen will be on 28 August and for the shares on NASDAQ New York on 29 August as shares are now trading C+1 in New York, but otherwise the same process as usual. And now turn to Slide 16 for the outlook. Based on the satisfactory results we have published today and the coverage we have for the Q3 of 2024, we increased the low end of our guidance range with US50 $1,000,000 and thereby narrowing the guidance range reflecting the increased transparency on full year numbers.

Speaker 2

Thus, we expect TCE earnings for 2024 of US1.15 billion dollars to US1.35 billion dollars and EBITDA of US850 $1,000,000,000 to US1 $50,000,000 The table shows that we in the Q3 of 2024 expects to have US7,859 earnings days and as of 12 August 2024, we had faced a total of 64% of those at a fleet wide rate of US38340 dollars per day. Further, for the full year, we are now at 68% coverage at a fleet wide rate of US42205 dollars per day. And with this, I conclude 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 will now open the line for your questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star 1 again. If you have dialed in and are listening via loud speaker on your device, Our first question comes from Jon Chappell with Evercore.

Operator

Please go ahead.

Speaker 3

Thank you. Good afternoon. Jacob, I'd hate to start with a big macro one. Seasonality makes complete sense. We've seen it many years.

Speaker 3

I think your chart that explained the crude and product was very interesting. But there is a little bit more, I think, macro uncertainty today. We've seen some softer numbers out of China. I think there's more concern about the consumer in general, IEA estimates for growth coming down. Your 3rd quarter bookings have been good so far, but do you think that some of the weakness in August could be more than just seasonality and a little bit more cyclical headwinds as we think about how we come out of the summer and into the stronger winter?

Speaker 1

Yes, thanks, John. Yes, certainly, that could be a scenario. However, if I look back, then it was exactly the same last year. We were experiencing if you plot in your data points, if you plot July, August, September last year, we saw exactly the same erosion in rates. So yes, it could be that it's not seasonality and there's something more fundamental.

Speaker 1

I don't think that there's something that really points to that at this stage. But clearly, that would be a risk for our market. But that's not that's the risk that we are having all the time. When I look at it sort of if I take it a step a notch up, and I think that the oil consumption globally and sort of what we thought would be a potential risk, let's say, a couple of years or 3 or 4 years ago, which would be a transformation of the underlying economies away aggressively away from fossil fuels. I think that has that's not what I'm looking at right now.

Speaker 1

So there will be seasonality and there will be bumps, but sort of in the broad view, I don't think this is a sign of this. And looking back, as I say, to 2023 numbers, it was exactly the same price mechanism in the month.

Speaker 3

Okay. And if we tie that together, with now the fleet reaching 96 vessels, which is I think by anyone's estimation, certainly critical mass gives you some optionality and flexibility with the fleet. If I go back and look at 7% ton mile benefit from Russia, 6% from Red Sea, certainly seems like these issues have probably more duration than anyone would have anticipated when they first began. But given that great impact, given now 96 vessels, given maybe some of the macro concerns, is there a desire or maybe are you looking at a little bit more, a little bit more balance in the fleet? Because it does feel like the contract market has been far more steady and substantially more elevated than the weakness in the spot market we've seen recently?

Speaker 1

Clearly, the markets, would say, not reflecting that there is this pump speed pump, you could say, currently.

Speaker 4

I think we are going

Speaker 1

to take it really opportunistically. Currently, we are of the expectation that this is a seasonality and that it will come back. I think that's the time to actually make those calls rather than in the current environment.

Speaker 2

Okay. That makes sense. Thank you, Jacob. Thanks. Thank you.

Speaker 1

Thanks for those questions, Jim.

Operator

Our next question comes from the line of Omar Khad with Jefferies. Please go ahead.

Speaker 1

Thank you.

Speaker 4

Hi, Jacob and Kim. Good afternoon. I am obviously nice earnings as usual and wanted to maybe piggyback a little bit on John's first question. We've obviously we're in a very strong market. Things have clearly cooled off a bit.

Speaker 4

They remain elevated definitely from a historical perspective. I guess there's been some talk of refinery run cuts in Asia. And just wanted to get a sense from you if do you feel like the spot market or the charter markets as they are today are reflecting that already? And then do you see risk or are you seeing signs that refinery run cuts will be coming into the Western Hemisphere as well?

Speaker 1

So when we look at it, then actually, I think we're starting to see that activity with our clients in Asia is actually coming back from the lows that we saw maybe a couple of weeks ago. It is on the back of the China demand have been slow as you pointed to, slower VLCC movements and also that product, how do I say, flow internally in China has been relatively slow, of course, leading to that you are not calling on more crude into your facility. But it may actually lead to being a beneficiary that the product tanker market will have is that China is still running at a rate that is higher than what their local consumption would be and that you could see that there will be additional export quotas likely to be provided. So let's see, it's a political decision. But I think so it's stacking up against that we will see more exports out of the region rather than less exports out of the region in the coming months.

Speaker 4

Okay. So it sounds like effectively then the markets has been reflecting this for some time. The a couple of questions just to follow-up a bit more on TORM specifically. This is perhaps an easy one to add. I think you probably have answered in the past, but just wanted an update.

Speaker 4

You mentioned that the 68 scrubbers that are installed on your fleet of the 85 plan. I guess is the plan still to move forward with those remaining installations? And would you do those, I guess, as part of your ordinary dry dock of those ships?

Speaker 1

Yes. So our plan is currently intact and it will be, as you say, also done in the ordinary course of the business. That's a mix of some of the acquisitions we've done over the last couple of years where it makes still financial sense. Of course, we will do it case by case and sort of look at what we deem to be the net present value of making the investment. The time is actually not so relevant because we're doing it during the ordinary course.

Speaker 1

But of course, installation itself is costly, and we do take it case by case and look at whether the installation makes sense. For now, our plan is to go ahead.

Speaker 4

Okay, great. And then just a final one, just regarding the dividend. I think this one, it's 87% of earnings, this last $1.80 I guess just in terms of the policy, how should we think about it in terms of it being formulaic? And I know you get this question a lot, but is the dividend quarterly, is it so formulaic in regards to basically paying out excess cash that's above a reserve? Or has it become a bit more discretionary by the Board?

Speaker 2

Yes. It's always been up to the Board for its discretion at the end of the day. But the way we sort of think about it is, as you're saying, and I think we should all think about like whatever we earn or we generate of liquidity from end of the quarter or start of the quarter to end of the quarter, that is basically what we sort of have the ability or anticipate to pay out as dividends or distribute out. So it's the same thinking, but of course, if the board teams to the management that we should sort of have another calibration of the final dividend we could do that. But in the outset, it's the same way we are thinking.

Speaker 2

We just take the net cash generation per quarter and then we that's the outset for us that we will distribute that. We have not changed it per se over the quarters, the last many quarters.

Speaker 4

Okay. Well, very good. Thank you for that color. I'll turn it over.

Speaker 2

Thanks, Omar. Our next question

Operator

comes from the line of Clement Mullins with Value Investors Edge. Please go ahead.

Speaker 5

Good afternoon. Thanks for taking my questions. I wanted to follow-up on Omar's question on Chinese demand. I mean, diesel demand has been fairly weak year to date as some tracks shift to LNG. And on the other hand, as EV adoption in the region increases, that could also weigh on gasoline demand.

Speaker 5

Could you provide some commentary on when do you expect gasoline and diesel demand in the region to plateau? And secondly, do you believe China's infrastructure is able to support continued LNG and EV adoption?

Speaker 1

Okay. Thanks for those questions. I think I'll start with Chinese demand for products. Well, of course, there is, as you point to, a number of factors that is impacting how is the Chinese infrastructure sort of developing both on EVs, adaption of that and also on consumption of diesel and gasoline on the other side of the equation. We see that Chinese demand is going down, but that is obviously not necessarily bad for product tanker floats.

Speaker 1

So we are more concerned not so much about the internal distribution of energy sources in the Chinese ecosystem, but rather what is the impact on trade flows out of the in or out of the refineries. And there, everything has been equal. We don't see that there is a threat from the EV adoption nor from how the sort of infrastructure issues that may or may not be there to build that further, that, that is having a negative impact on the product tanker market as such.

Speaker 5

That's very helpful. Thank you for taking my questions and congratulations for the quarter.

Speaker 1

Thanks a lot. Thanks for dialing in and for the question.

Operator

Our next question comes from the line of Peter Hagen with ABG. Please go ahead.

Speaker 6

Hello and good morning or good afternoon, I say. Two questions from my side. In terms of the TC market these days, would you consider doing something longer on current levels? And current levels, I'm reading is well, just shy of 30,000 for MRs for 3 years or a little bit more than 40,000 per day for LR2s. Are those levels attractive, you think, for 3 year chartering activities

Speaker 2

now? Yes.

Speaker 1

I think you're right on we did do that, Peter, during the quarter. And it took for 3 years with one of our clients in the low mid 40,000. So yes, we would look at that as they all depend on the trade and our clients. That is a market that we are constantly evaluating and that we also did this quarter, yes.

Speaker 6

Okay, understood. And in terms of the volumes done, would you sort of consider doing a larger share of your fleet to lock in those rates? Or are you happy to spread spot still?

Speaker 1

We're happy either way. So obviously, we are believers in that the market will offer good rewards, good risk return when you are stuck. And also from part of it, we will also happily engage with our clients. So I don't think it is an either or also given the number of vessels that we've got there. I think we can play both sides, Peter, on that.

Speaker 1

But the current levels are, in our opinion, attractive enough to also engage in. Yes.

Speaker 6

Okay. And a second question for myself. In terms of your presentation in Slide 8, you're here showing, well, approximately 8,000,000 deadweight tonne, if I read it correctly, of crude tankers or LR2s and crude tankers moving into the product tanker fleet. Is this to be understood as your expectation for the full year? Or does this imply that you have some sort of reduction from what we now hear are well, given the LCCs are doing clean credit these days?

Speaker 1

Thank you, Peter. No, that's a good observation, good question. So this is here now, this is what we see the portion of crude tankers that have migrated and you can say for us cannibalized on the product tanker trade. So this is not our estimation of where we will end the year. We do expect that a significant ratio of these vessels will go back into the interest rate once you see a seasonal pickup also in the VLCC and in the Suezmax trades.

Speaker 1

So this is here now what we can identify as vessels that are carrying key petroleum products as we speak.

Speaker 6

And just as a quick follow-up on that. Speaking for myself, I was pretty surprised when I heard about all those fields this year, in particular, trading clean. And to some extent, it makes me somewhat worry about the product trade, of course, because the crude tanker fleet is larger. And if all of them are capable of coming out and cannibalizing your market, I would think about that as a threat. But to what extent have you been surprised to see the migrations coming into your part of the market over the past couple of months?

Speaker 1

Yes. So for us, it is not surprising if the VE market is offering, let's say, let's say, pick your number, dollars 20,000, dollars 25,000 per day for a VE and that you can, in a way, take 2 LR2¢ and the LR2s are trading at $0.50 and that you can then optimize your earnings on the VE2, let's say, dollars 40. That makes sense, if I'm aware of you. But if the market for LR2 is $30,000,000 and I'm getting $0.25 on a V, you're not going to do 2 LR2¢ because it's simply not economically feasible. So there was a window where the V's were where the you could say the gap between what V were making and what are the 2 going made that incentive.

Speaker 1

I don't think it is incentive even today to do it because your alternative from going out of the V market is not attractive right now. So I think what it demonstrates is that crude and product is not 2 separate markets. And obviously, if you have no V market, V's will try to cannibalize on CPPs if those rates are. So I think that's just a think it's more that there is a you cannot have a differential, let's say, of 3 times LR2 to a V because then it will be attractive to do 2 dollars LR2 on a V and you get a higher TCE. Does that make sense?

Speaker 1

So that's a

Speaker 6

Yes.

Speaker 1

You could say that the limit to how high and is a 2 rate can go on its own over time. That doesn't make more sense. Yes. Because you're saying that it was the V is trading at 50, well, then, you know, atul could I'm not I'm saying a little tongue in cheek, but then they could be double, without making it into a price for VE to switch over.

Speaker 6

Yes, yes. And thank you. Fully, fully understood and agreed to. I was more speaking to the technical complications of actually cleaning up those tankers. I thought it was close to impossible to see those ever trading or be accepted by the cargo owners to actually trade.

Speaker 6

But fully agreed and understood in terms of economic incentives. Yes. Thank you.

Speaker 1

Thank you. Good question. Thank you.

Operator

We have no further questions at this time. I will now turn the call back to Jacob Melgaard for closing remarks.

Speaker 1

Okay. Thank you very much for dialing into the Q2 2024. Have a great day.

Operator

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

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Key Takeaways

  • Strong Q2 financial performance: Time charter equivalent (TCE) earnings rose to USD 326 million, EBITDA reached USD 251 million and net profit was USD 194 million, enabling a dividend of USD 1.80 per share and a return on invested capital of 29.5%.
  • Geopolitical drivers boosting demand: Tensions in Ukraine/Russia and the Middle East have forced longer voyages and rerouted cargoes—Red Sea transits fell from 12% to 4% of global clean products—adding around 10% to ton-mile demand so far this year.
  • Ongoing fleet expansion and renewal: In July TORM agreed to acquire eight second-hand MR tankers (six with scrubbers) for USD 340 million and divested an ageing MR for USD 23.3 million, financing growth through its partner share structure.
  • Favourable supply–demand outlook: Net ton-mile growth has outpaced fleet growth, orderbooks stand at 19% of the product tanker fleet (mostly delivered post-2028), and refinery closures in mature markets point to sustained long-haul trade.
  • Upgraded full-year guidance: TORM now expects 2024 TCE earnings of USD 1.15–1.35 billion and EBITDA of USD 850 million–1.05 billion, with 68% of the year covered at a fleet-wide rate of USD 42,205 per day.
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