TORM [TRMD] Conference call transcript for 2022 q2
2022-08-18 14:40:22
Fiscal: 2022 q2
Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining TORM plc Six Months Ended and Second Quarter 2022 Results Call. Throughout the recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead.
Andreas Abildgaard-Hein: Thank you for dialing in, and welcome to TORM's conference call regarding the results for the second quarter and first half year of 2022. My name is Andreas Abildgaard-Hein, and I'm the Head of Investor Relations in TORM. As usual, we will refer to the slides as we speak. And at the end of the presentation, we will open-up for questions. Please turn to slide 2. Before commencing, I would like to draw your attention to the Safe Harbor statement. Please turn to slide 3. The results will be presented by Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle. Please turn to slide 4. I will now hand the call over to Jacob.
Jacob Meldgaard: Thanks a lot, Andreas, and good afternoon. Thank you all for dialing in. It's really a pleasure to be â to be here today. We have published our results for the second quarter of 2022. And here, let's get into it. We achieved an EBITDA of US$153 million, and in terms of profit before tax of US$107 million. The TCE across the fleet ended just shy of 30,000 at 29,622 per day. And here, as per the 14th of August, so that's last Friday, we have then faced two-thirds of the open days here in the third quarter of 2022 at even higher rates at 45,462 per day. Here, after the end of the second quarter of 2022, we purchased 75% of the shares in Marine Exhaust Technology, reached TORMâs ME Production. ME Production, they produce solutions to reduce air balloon in connection with Marine Transportation. And TORM â we have had an extensive historical relationship with ME Production, including joint ownership of a scrub production facility. Now by purchasing our majority part of ME production, we are acquiring 70 people with R&D and with production capabilities. And here, as we see it in a world of ongoing supply disruption, the acquisitions will help us to timely secure the sourcing of the important equipment that if needed for further optimization of our fleet. During last quarter, we announced that, we changed our distribution product policy. And today, I'm pleased to announce that TORMâs Board of Directors has approved dividend of $0.58 per share, and the distribution amount would be around $47 million, and this is in line with this new distribution policy. Lastly, here, in the introduction, I'd like to put some focus on TORM's ability to utilize now the strong second-hand prices to also divest and focus seven of the old vessels in fleet. These vessels have been sold for from the back end of last year until the end of the second quarter of this year and they had an average age of 18 years, and this added $62.8 million of liquidity after debt repayment. Further, here after the end of the second quarter this year, TORM has decided to order an additional 8 scrubbers for our fleet. That means that we will be reaching a total of 68 scrubbers when this scrubber investment program is complete. Please turn to Slide 5. Now since the start of Russian invasion on Ukraine, back in February this year, we've seen a strong improvement in the underlying product tanker rates. And here, in fact, in the second quarter of 2022, the quarterly rates burned by our MRs were the highest since the fourth quarter of 2005. The political situation has added great volatility to the market, but every time the rates have fallen back from peaks, the new lows are higher than the levels that we saw earlier, indicating an underlying strong upward trend. Although the geopolitical tensions in Europe, the sanctions against Russia, they have contributed to the current strong freight rate environment fundamental drivers that are not directly related to the geopolitical situation here in Europe has been an important factor as well. And yes we mention some of the key drivers in US Gulf refiners, they have been running at utilization rates above 95% over the second quarter of 2022 and even slightly higher in July of this year. This has led to strong exports from the US Gulf, which have been met by strong import demand here to mention especially South America. Strong product inflows caught there some discharge delays on the West Coast of Mexico. This led in turn to logistical floating storage in that region. We also saw exports of oil products from the Middle East to Europe to Africa and Asia increased here in the second quarter despite delays at the ramp-up of secondary units at the new Jazan refinery. Demand for imports from countries, which have recently seen the refinery closes. And here to mention the most notably are Australia, New Zealand, and South Africa. Those imports also continue to grow in the second quarter for the year, leading obviously also to a stronger demand for our services. Please turn to Slide 6. Over the coming two, three years, we'll see that the main demand and supply drivers or the product tanker market will continue to be highly supportive. The key demand side driver is expected to be the EU ban on Russian oil products, which leads to a need to recalibrate the whole old product trade ecosystem. This will lengthen trade distances and hence, obviously, increasing the ton-mile demand for tankers. The trade recalibration effect comes on top of the changes in the refinery landscape with recent refinery closures in importing regions and new capacity additions in the exporting regions, , which is expected to lead to higher ton mile demand. First reform is expected, again, from the need to replenish both commercial but also the strategic oil inventories in many countries and inventories have been growing for two years now. This will lead to an additional trade volume again supporting the underlying product tanker market. We should not disregard the fact that the current environment with high oil prices and a high inflationary pressure on the global economy are likely to slow down the growth pace of the global oil demand. The sign of this was seen in the US recently, where gasoline demand this summer reacted to the high prices and fell below last year's levels after gasoline prices reached record high levels. Nevertheless, we believe that the effects of the redistribution of the energy supply chain will overweigh the potential negative effects caused by slower demand growth and it will be further supported by the need to refill commercial and strategic reserves once the oil price structure would be supporting that. Further, the increasing oil use in power generation and the gas to all switching in industry, especially in Europe, are likely to have further support to global oil demand. Now if we turn to the supply side, to the tonnage side, the product tanker supply situation has not been as favorable as we see it right now for, let's say, at least the last two decades. And with the current low order book with the limited newbuilding activity and actually also the strengthening that is ongoing right now of the crude tanker market, this will all contribute to this. So even if we come into an environment with high earnings overhang, this will trigger more newbuilding ordering activity, but these vessels would not come to the market before at the earliest end of 2024 or for the majority, even later. And this will secure that we are looking into a scenario with low fleet growth for at least the next two to three years. Please turn to slide seven. Now on this slide, what we tried is to quantify the expected increase in ton miles from the drivers for this year that I mentioned earlier. And here, when we do a bottom up and calculate, the EU ban on Russian oil products and the corresponding trade recalibration will add a net of 7% to the product tanker ton mile. This is purely based on changes in trade distances only. So, for instance, Northwest Europe, imports is from the Middle East instead from the Russian Baltic coast. It will increase the ton mile for the same amount of fuel by around 3 times. Now this is a permanent effect which will bring the fleet utilization rate to a new higher level as long as the sanctions against Russia are in effect. On top of that 7%, we expect a ton mile growth of 3% from the continued oil demand recovery from the COVID-19 effect during the year. This comes to include, as well, the impact of the recent refinery closures in, for example, Australia, New Zealand, South Africa, which with the import to all of these regions actually increasing. And as mentioned already on the tonnage supply side, it's really protected for the coming years. We see a low fleet growth for this year and also the next couple of years. And the overall low fleet ratio is now at 5%, with contracting activity for the past four quarters being very low. So when we add that up, we can also look at that we need to deduct the Russian refined products and low fleet that will no longer be available to the world market due to sanctions, and this will keep the accounting for about 2% of the total products and low fleet. Finally, since the beginning of the year, we've seen a considerable number of LRs and shifting into dirty trades on the searching Aframax rate immediately after Russian invasion of Ukraine, and then we saw a shift partly back to clean trade center of this climbed above the dirty trades. And this has led into to a 2% net decline in clean trading the LR2s compared to the beginning of the year. Now please turn to our slide number 8. And here, when we look more closely on the impact of EU sanctions in Russia, we can say that so far, we have actually only seen a limited shift in trade pattern and the full demand effect will only be recognized by early February 2023, when the EU sanctions will come into full effect. If we look at European oil products from Russia and most of this is diesel. The average daily volumes so far this year are actually even slightly higher than what they were last year. Meaning, trade recalibration as, in some ways, even not started. Nevertheless, imports from non-Russian origin have increased, reflecting the recent refinery closures in Europe, which have led to increased import demand into the region. If we look at more detailed data, European imports from Russia have actually declined since February 2020, when Russia invaded Ukraine, but the decline has been relatively small and from a high base. The positive impact on the freight rates has up, however, been significant already. This recalibration will be facilitated by the ramp-up of the Jizan refinery, as already mentioned in Saudi Arabia and the start-up of The Al Zour refinery in Kuwait, both scheduled for -- to coincide in the coming months. And here kindly go to slide number 9. If we look at medium and long-term drivers that go beyond the trade recalibration due to the geopolitical conflict we are facing in Europe right now. We're already seeing more than 2 million barrels per day of refining capacity has been closed down permanently, and a further 0.6 million is scheduled to be closed down during this year and next year. On top of that, another 1 million barrels per day of capacity is at risk of being shut down. Most of the affected capacity is located in regions which are already largely importers of refined oil products such as Europe, the U.S. West Coast, U.S. East Coast and again the three countries that I mentioned a number of times Australia and New Zealand, South Africa. But even in the regions where refiners have already been closed down here in 2020 or 2021, we have not seen the full effect on import demand yet as oil demand has not come back to the Pre-COVID-19 levels. At the same time, more than 4 million barrels per day of new capacity is scheduled to come online, mainly in the Middle East, China, and India, regions we saw today are the large exports of oil trucks. Both these trends are positive for trade and Torm in the coming years with only a few projects which are less positive for the trade. Slide 10, please. As already mentioned, oil product inventories have been reduced since the summer of 2020, as refinery production has lagged behind the recovery in order momentum. Especially the case for diesel where inventories in main training hubs have fallen to 20% below pre-2019 levels, the same magnitude as the excess stock seen in the early months of the quarter 2019 pandemic. So, the need here to replenish the stock to at least pre-COVID-19 levels translate into higher fuel transportation needs, adding at least 2% to the ton-mile demand for product tankers. Now, the exact timing of this 2% effect is concerned, given that currently we have a tight supply/demand situation for diesel and on top of that, a backwardated price structure. And here, kindly turn to slide 11 in the deck. Now, our positive outlook for demand for product tankers in the next three to five years coincides with supply side, which is the most important, which it has been for at least the past 25 years. With record high newbuilding prices and limited CPR space, tanker ordering has renewed for the past four quarters. And as you know, the order book has consequently forward to a feed rate of product tankers at a historically low level of 5%. This is further supported by similar historically low 5% order book fleet ratio for crude tankers. Consequently, the big growth here in the next couple of years will be around only 1% to 2% a year, which is only half the pace that we've seen on average over the past five years. So, yes, conclusion -- my concluding remarks on this product in market is that we really expect that we'll continue to see volatility on the market, of course, due to the current geopolitical tension, but that there will be considerable ton-mile increases due to the ultra-rerouting. This is supported, again, by the increased refinery dislocation effect and the need to rebuild impeded crude and product inventories. Please turn to slide 12. If we take here a look, as you can see of TORM's commercial performance we had with our self-imposed trading restrictions performed on the average of our peers and in almost all quarters. During the past six years, we have outperformed our peers in our largest best-of-class. Here in the second quarter of 2022, with achieved rates of 29,174 per day. In general, I'm highly satisfied with one platform consistently again now deliver strong results on an day-today basis. Kindly turn to slide 13. Our strong TCE earnings are driven by our continued focus on positioning our vessels in the basins with the highest in potential, if we look as related second quarter of 2022, we again had an overweight west of the Suez Canal, where we also saw an outperformance when looking at the pull forward. So with this, hand it over to you to Kim, you can dig further in and elaborate on the cost performance, our liquidity and of course, of trading in our stock.
Kim Balle: Thank you, Jacob. As Jacob mentioned, we are seeing a continuous rate increase in the tanker market in the second quarter of 2022 with our TCE rates reaching $29,622 per day. Spot rates are just below $35,000 per day for the quarter, but due to our accounting principles, part of the revenue related to the increasing rates at the end of the quarter will be recognized after -- so far in the third quarter of 2022, we have seen a further increase in TCE rates per day, and we have now fixed 67% of our data at $45,462. Due to higher repair and maintenance costs, we saw an increase in our operating expenditures during the second quarter of 2022. However, for the first half of 2022 showed opening per day was at $6,325 compared to $6,652,day in 2021. Yes, we are at Slide 14 for your information. TORMâs admin costs in Q2 2022 was $4,500. So we will maintain our growth on cost optimization without advertising quality and customer polls -- the full year normalized EBITDA breakeven is expected to be around $8,600 per day. Please turn to Slide 15. TORM continues the strong performance with EBITDA for the first six months of 2022 being at $240 million. While there is the certain of our older vessel as Jacob mentioned in the beginning and having LR2 TORM has delivered. During the second quarter of 2022, net LTV increased to 43% due to an approximately 13% increase in vessel value compared to the first quarter of 2022 and strong cash generation from our operations. While CapEx commitments are limited. Our cash position is very solid. We are now planning to install a total of 58 scrubber on our fleet -- the investment in the eight business scrubbers will be around $16 million. Please turn to Slide 16. TORM will distribute approximately 74% of the net cash generated during the second quarter of 2022 as dividend, consistent with our distribution policy announced earlier in May 22. Our distribution is based on a cash position, including the working capital facility. That total of US$203 million, less restricted cash primarily related to financial instruments of $24 million less MR proceeds of $24 million and a minor cash reserve for investors of US$120 million. We have included $40 million related to the sale of a vessel which was delivered in July, but the related debt was paid down in June. In conclusion, TORM will distribute dividends per share of $0.58 or approximately $47 million. We have with our new transparent distribution policy, and that is -- we've already now benefit our shareholders. Please turn to Slide 17. During the second quarter of 2022, we repaid debt of $42 million debt repayments related to the sale of TORM Horizon and some good one constitutes $9.8 million tons. Looking at our maturity profile, we have no major refinancing until 2026. We have low financial leverage, dedicated earmark proceeds, which provides strong financial and strategic flexibility to also pursue value-enhancing opportunities should they arise. We are very pleased with our stable maturity profile and financial leverage. Slide 18, please. Since the establishment of our dual listing back in 2017, we that work on getting a better reach to the US market. We are, therefore, pleased to see that the average daily trading has increased by almost four times over the past year, with our US market picking up strongly trading volume at NASDAQ, New York accounts for approximately 57% of the total trading volume during the second quarter 2022. Since the end of Q1, established market cap increased by approximately 115%, which is also supported by our operational leverage, so we currently maintain a high operational leverage, which means that and assume $1,000 per day increase in spot rates over the course of the full quarter and all other things being equal, result in a net profit effect of $7.2 million. And right before we entered into this meeting, the Torm share was trading at in DKK154, with total market cap for us around DKK12.6 billion. And in US dollars, that will equal around just about US$1.7 billion. With that, I will let the operator open up for questions.
Operator: Ladies and gentlemen, at this time, we will begin the question-and-answer session. And our first question is from the line of Jon Chappell from Evercore. Please go ahead.
Jon Chappell: Thank you. Good afternoon.
Jacob Meldgaard: Good afternoon Jon.
Jon Chappell: Hi. My first question, I'm trying to recalibrate slide 7 and 8. And on slide 7, you have the ton mile at the start of 2022 -- ton mile at start of 2023 with the 7% impact from the ban in Russian oil products. But then on the next slide, you say that really hasn't even started yet, and it won't really kick in until 2023. So is this 7% that you're incorporating within the start of 2022 to start of 2023 your estimate for the full impact of this recalibration in a pro forma manner, or are you saying there's a 7% impact this year? And then once the sanctions truly kick in, in February 2023, there's the potential to be even greater?
Jacob Meldgaard: Yeah. Thanks for -- let me clarify that. So what we are trying to describe on slide 7 is exactly to your question is to illustrate what will be the full effect between January 2022 up until January 2023 of the trade recalibration. Our estimate is that out of 7% that we model up above 2% of this is already baked into this. So there's still more to come. And then the 3% additional is also over the year, the effect of the refinery dislocation and just demand growth.
Jon Chappell: Got it. Okay. That helps. And then my second question is a clarification and then a question off the back of it. In your release you note that, your six vessels that are held for sale at the end of 2Q 2022. But if I read the timing of the vessel-by-vessel, it looks like the Ingeborg, the Valborg, Gyda -- Gyda and Moselle, would be the four that hadn't been delivered as of 6/30 because the other four were delivered before the end of the quarter. So, I'm just trying to figure out those four and how that relates to six held for sale. And then the second part of that would be, does that either insinuate, or would you kind of confirm that at this part of the market, you're still looking to liquidate some of the legacy older vessels in your fleet?
Jacob Meldgaard: You're absolutely correct in everything that you described. And so four vessels, the ones mentioned by you, have been sold. And then there are two vessels that we're constantly potentially telling that we -- in our books quoted as vessels for sale.
Jon Chappell: Okay. And then, I guess the final one would be after the two that you're contemplating for sale, how many over 12-year old vessels would be remaining in your fleet? And would you figure at some point in this upturn, you would contemplate kind of the completion of the modernization of the fleet?
Jacob Meldgaard: That's a good one. I don't think that we are -- I can go back to you on how many over 12, but I think what we see as a useful lifetime of our assets is actually, as you can see from the way we put it is, on average, around 18 years. We don't really have a particular strategy to lower that, especially with the earning power that we foresee for all assets irrespective of age in the current environment.
Jon Chappell: Okay. Jacob, very helpful, as always. Thank you very much.
Jacob Meldgaard: Thanks. Have a great day, Jonathan.
Operator: The next question is from the line of Richard Diamond from Castlewood Capital. Please go ahead.
Richard Diamond: Yes. Good afternoon. If someone were to order a new ship, which has a useful life of 18 years and take delivery in 2025, what would they use for a power plant? LNG is too expensive. Ammonia is too dangerous, and methanol has half the energy density of diesel. So you'd have to either build much larger ships on ships or reduce the distances that ships would be able to travel. Do you have any thoughts?
Jacob Meldgaard: Yes. Thanks for that question, Richard. I think my current instinct is that, as you point to, if you are an investor who decided upon, let's say, in 2025 to have an asset where the useful life time goes up until almost close to 2050. And we have, at this stage, no clarity on the future fuel as such. Of course, we can say that's probably going to be within the range of what you just described. I think the true investor would purchase a vessel that has a conventional engine type, i.e., ability to efficiently burn low sulfur or high sulfur fuel with a scrubber. But what you would want is for that engine to have the optionality and flexibility to be able to already now be retrofitted for other fuel types, for instance methanol or LNG or others. And then the problem comes, that retrofitting would come at a relatively high CapEx, because the CapEx with the transformation into other fuel types is not really with the engine itself, it is with the storage of the fuel and storing of sufficient fuel in order to make transshipping workable, how can I say, methodology for that asset. That's the way I think about it currently.
Richard Diamond: This is a follow-up question. So, the cost of such a ship would have to be 15% to 20% more and given potentially the shorter life, rates would be -- have to be substantially more expensive to justify the investment, am I thinking about it correctly?
: Not necessarily. Probably your line of thought. I think the additional cost from what I just described is marginal because what I just described is really, weâre preparing to make the bigger investment at a later stage. So, you are actually just making a flexible engine. And that is possible with for instance, MIM that you have an sonic engine that can already be prepared with very little modification to use different types of energy. So out of the box, your additional cost is much more marginal higher than what you described. Then of course ultimately, you will need to make the storage tanks available on board the ships. And that is where you would have the ramp-up to the probably 20% is a fair estimation of that in the current environment.
Richard Diamond: Thank you very much
Jacob Meldgaard: Youâre welcome.
Operator: The next question is from the line of Anders Karlsen from Kepler Cheuvreux. Please go ahead.
Anders Karlsen: Yes. I have a question in terms of term fixtures and your view on what levels would be enticing enough for you to start fixing our chips and whether or not you have fixed out any ships for longer-term charters during the quarter?
Jacob Meldgaard: Yes. So, the answer to that question is that, there is more interest from the type of counterparties, which we would like to engagement today than what we saw let's say, when we had our Q1 result back in May, but we've still not been enticed to engage in that. I think some of the end users are only starting to look at strategically taking tonnage for let's say, three-year charts and it could be that it will be interesting in the time to come here to look at something like that. But we have not done any deal at this stage.
Anders Karlsen: Okay. And do you have any -- if you were to start fixing, is there any limit to how much of your fleet you would fix out, or do you have any preference in terms of your spot contractor exposure?
Jacob Meldgaard: No, I think it will depend on the liquidity in this term market is not at this stage, very high. So I think it would simply be the availability of the counterparts of sufficient quality as number one and to the other side. So I wouldn't put a particular figure. We don't have a strategy that we want to be spot, we just see that so far is the strategy that has generated the highest return to the company over time.
Anders Karlsen: Yes. That's fair. Thank you.
Operator: So there are no more telephone questions at this time, and I hand back to Andreas Abildgaard-Hein.
Andreas Abildgaard-Hein : Thank you. We have a few questions on the webcast. And the first one is for you, Kim. You mentioned that the gross profit for Q2 was almost $35,000 per day, which is higher than the TCE rate. So there's a question here. Can you please just clarify the difference between the spot rates and the TCE in rate?
Kim Balle : Yes. Thank you, Nick . You're right on your comment that you will see that it is written on our Page 10 in the quarterly report with this spot. There was the spot on the TCE, but on top of that, our revenue recognition principles are what we call low to discharge. So that means that when we fix a voice fit with the third-party until we load it that is not recognized as revenue until we load the cargo. So in a scenario where you are at an end of a quarter, for instance, and you fixed on an increasing rate you have a high spot rate, but you will -- but you have full recognition or much of the recognition of that revenue in the coming months/quarter. So in the scenario we've been in the end of the Q2 quarter, we actually saw high degree of revenue going into the next quarter. So if it's there, it's just going into the next quarter, and then we don't know what will happen at the end of that quarter, but that's how the revenue recognition is. Hope that helps.
Andreas Abildgaard-Hein : Thank you, Kim. And the question for you, Jacob, could you talk about the downturn in MR rates, we have been seeing on the recently with the TCE report. How sustained is that downturn? And does it change the downward TCE rate for MR as well?
Jacob Meldgaard : I can try and talk into that. And what we've seen at least is that in the Atlantic Basin, MR rates ease somewhat. My overall impression is the same as I've described earlier in our presentation in the call is that we will have volatility when we are at these levels, small changes in demand supply leads to relatively high changes in the underlying freight rate, simply because we are so high out on the utilization curve. So we've seen that trend over the last couple of weeks that the rates are a little softer for MR in the Atlantic. The specific or as I believe, is just that there has been a little less number of cargoes coming out of some of the refineries is based on the US side, and that simply takes away just the top of the market. I don't think it's an underlying trend that will lead to changes in other sectors. And I don't think that it is a trend also now we've seen at the end of this market. But it's absolutely correct. They are currently in the western hemisphere, MR has trended down from the highest. It was actually so that just in the early part of August, we fixed an MR in the US, Gulf at around 80,000. And if you did the same voice today, you will probably get something around 30 to 35, that's high volatility, I would say, because as you all understand, nothing that has fundamentally changed in our market. So I think we're going to see this tendency to a very high volatility, continue I don't see it as something that will lead into the other sales.
Andreas Abildgaard-Hein: Thank you, Jake, and a final question. What are the risks that the EU Russian embargos on Russian oil and oil products are missing ports?
Jacob Meldgaard: Yes, that's a very good question. I think it's more for politicians and diplomacy to give the answer. But inside our thought is that let's just play out the war in Ukraine, comes to an end abruptly very, very soon. That could be my personal hook that suffering in Ukraine stops. And in turn what will then be the decision-making process in the EU around fixed sanction package and other sanctions on the regime in Russia. Personally, I can say that I would be disappointed if the war comes to an end and that we then see that we turn everything back to normality being as the world was before the 24th of February 2022. However, of course, that is something that politicians would be capable of deciding. That's not my intent that, that is the undercurrent when I listen to diplomats and politicians in the EU. But it is, of course, something that one should think about as a risk. I think it's unlikely.
Andreas Abildgaard-Hein: Thank you, Jack. No further questions. So this concludes the earnings conference for the second quarter and first half year of 2022 results. Thank you for participating.
Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.
