TORM plc Q4 FY2024 Earnings Call

Thank you for standing by. My name is Pam, and I will be your conference operator today. I would like to welcome everyone to the TORM 2024 Annual Report Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to CEO, Jacob Meldgaard. You may begin.

Thank you, and a warm welcome to everyone joining us on the call here today. So as you all know, this morning we released our annual report for the full year of 2024. And I dare say that all in all, it was a very satisfactory year for TORM, but also a year that has demonstrated that we operate in a volatile industry, influenced by a wide range of external factors that we need to take into consideration. As usual, I'll start with a few comments on our business and how we're doing. And then I will provide you with our take on the current market and how we see the development in the quarters to come. Looking back at the past year, we are pleased to report a very satisfactory performance, with TCE earnings climbing to a new all-time high of $1.135 billion, supported by the additions made to our fleet during the year. Freight rates remained at high levels throughout most of the first three quarters, enabling us to achieve fleet-wide rates of $39,626 per day. However, in the fourth quarter, freight rates decreased, and the normal seasonal strengthening of the market did not materialize. Despite continuous vessel rerouting, volumes on long-haul voyages from east to west were lower, and our fleet-wide rates decreased to $25,775 per day, thus adding to the downward trajectory seen from Q2 to Q3. While the rate levels in the last quarter were lower compared to the strong performance in the first three quarters of the year, we still delivered solid earnings. For the full year, we achieved a net profit of $612 million and a return on invested capital of 24.3%, demonstrating resilience despite a challenging market environment. Now, looking into 2025, the ever-changing nature of shipping presents both challenges and opportunities. Geopolitical developments, trade flow shifts, and oil demand fluctuations require that we continuously adapt our business. We remain confident in the factors that are within our own control. These include fleet efficiency, disciplined cost management, prudent capital management, and a well-executed commercial strategy. However, we acknowledge that geopolitical risks introduce a wide range of potential earnings outcomes for the year ahead. Beyond geopolitics, market conditions will be shaped by trade disruptions, regulatory changes, and broader macroeconomic factors such as global oil demand and economic growth trajectories. These variables will dictate both freight rates and fleet utilization. So to stay ahead, we continuously monitor and analyze geopolitical trends, ensuring we remain well-positioned to navigate uncertainties effectively. So here, I return to slide 5. For the past three years, geopolitical tensions have driven product tanker rates to a new higher average level. However, in recent months, as already noted, we have seen a decline in rates as short-term factors, such as intensified crude tanker cannibalization, have softened the positive impact from geopolitical factors and general market uncertainty has increased. The rates have nevertheless remained at levels which are still strong in historical terms. Please turn to slide 6. To conclude on the year 2024, we saw a very strong positive impact on ton miles from the Red Sea disruption, which led to longer trading distances at the same time as growing oil demand and changes in the refinery landscape increased the volume of products being transported. This positive ton-mile effect was, however, front-loaded for product tankers, as after the first half of the year, crude tankers cleaned up in order to benefit from lucrative rates from transporting clean products from the east to the west via Cape of Good Hope and took up most of the incremental ton miles. For full year 2024, clean product tanker ton miles increased by 9% in 2024, but due to these crude clean-ups, product tankers benefited from only two-thirds of that. While crude cannibalization declined toward the end of the year, trade volumes on the routes mostly affected by the Red Sea disruption fell to levels that offset the longer trading distances. With this, the ton-mile impact of the Red Sea disruption, in fact, became non-existent by the start of this year. Please turn to the next slide, to slide 7, and I'll elaborate a bit more on that. So as the main trade route affected by the Red Sea disruption is from the Middle East to Europe, the outcome of the potential future Red Sea normalization really depends on this route. Currently, Europe's diesel imports are down by 30%, with especially flows from the Middle East affected. This has effectively pushed ton miles on this trade route down to pre-disruption levels, although distances have increased. At the same time, we believe that such low imports levels are not sustainable, especially taking into account that European diesel demand is expected to increase slightly this year, supported by increased demand for diesel from the Mediterranean Emission Control Area, ECA, from May of this year. At the same time, three refineries will close down in Northern Europe this year, while diesel stocks are at below average levels. We expect that a potential reopening of the Red Sea Passage will encourage intra-basin trade and return the volumes lost since the end of 2024. At the same time, incentives for crude cleanups would decline, even with shorter sailing distances ton miles would stay at around the current levels, with any upside to imports would add to product tanker ton miles. We deem it unlikely that the volumes would not increase, as the current levels are unsustainable, and any increase in imports needs to be met by the Middle East, given refinery capacity closures in the U.S. Now please turn to the next slide, to slide 8. This brings me to the conclusion that the impact of any potential reversal of the latest geopolitical drivers will likely be less pronounced, as much of the impact is currently non-existing. As I just explained, the potential Red Sea normalization could, in fact, be neutral for product tanker ton miles, with an upside to this from potential increases in European diesel imports. Shorter trade distances may be offset by a potential return of currently lost trade volumes and lower incentives for crude tanker cleanups. Similarly, any potential easing of sanctions against Russia would not hit the product sector market by full effect, as some of the gained ton miles have receded by now. Due to the uncertainty with regard to the prospects for cease-fire, we do not foresee a quick abolishment of EU sanctions against Russia. And finally, we also have some new potential geopolitical drivers which could have a positive ton mile impact, such as a potential tariff war between the U.S. and its closest neighbors, Canada and Mexico, leading to potentially new trade redirection towards longer distances. Now please turn to slide 9. So let me now also take a look at the ton supply side. As we pointed out earlier, the relatively high product-tanker order book should be seen in combination with the fact that the average age of the fleet is the highest in two decades. With 50% of the fleet being more than 20 years old, this would potentially offset a large part of the fleet growth in the coming years. Furthermore, we see that as vessels turn towards 20 years of age, their average utilization drops significantly compared to younger vessels. That would lead to a gross share of the fleet operating at lower utilization. And in addition, a large share of especially the older fleet is sanctioned, which is expected to support exits from the market. This is especially the case for the combined LR2/Aframax fleet, where almost three quarters of the older fleet are today under U.S. sanctions. We'll now turn to slide 10. To sum up on the market, geopolitics are expected to drive the product-tanker market also this year, on top of the demand and supply fundamentals. Yet the level of uncertainty is even higher, and the speed of change has increased significantly, with the new U.S. administration's more aggressive approach to geopolitics and trade policy. I already touched upon potential normalization of the Red Sea situation, potential easing of sanctions against Russia, and the proposed tariffs on oil from Canada and Mexico. Another element of uncertainty on the market stems from the U.S. administration's proposal to implement a port fee to operators with vessels built or on order in China. On the other hand, the new U.S. administration's stricter approach towards Iran and Venezuela is expected to benefit the product-tanker market via the reduced risk of crude cannibalization. I'm certain that TORM is well positioned to navigate this environment of increased uncertainty through our strong capital structure, operational leverage, and integrated platform. And now here, with these comments, I conclude my part of the presentation, and I hand it over to my colleague Kim, who will walk us through the financials.

Thank you, Jacob. Now please turn to slide 12 for an overview of the financials. In the fourth quarter, TCE amounted to $215 million and based on this, we achieved $142 million in EBITDA and $77 million in net profit. Fleetwide, we averaged TCE rates of close to $26,000 per day, with LR2 slightly above $34,000 and LR1s at over $22,000, and MRs at more than $23,000. These numbers are in line with the coverage that we published in connection with our Q3 results, coupled with the lowest spot rates in the last half of November and the month of December, thus in line with our overall guidance communicated back in November. For the full year 2024, we generated TCE of $1.135 billion, EBITDA of $851 million, and net profit of $612 million. As you can see on the right side of the table, full year 2024 rates were close to the elevated levels we saw in 2023. However, the composition of these rates tells a more nuanced story. The high annual rates were largely driven by exceptionally strong market conditions in the first half of the year, high supply-demand fundamentals, and favorable trade patterns supported elevated spot rates during this period. In contrast, Q3 saw some softening, reflecting cannibalization by crude carriers that captured a significant part of the additional ton mile demand. While rates remained healthy, they trended lower compared to the earlier part of the year. The fourth quarter brought an additional setback with no seasonal upswing and rates declined further. Due to the industry's natural spot exposure, our earnings per share are closely tied to movements in trade rates, and this dynamic becomes especially evident in a very volatile market environment. In Q4, we experienced a sharp decline in trade rates, which had a direct and material impact on our earnings per share. Thus, basic earnings per share for Q4 decreased to $0.77 per share compared to $2.18 per share in the same period last year. This time, our Board of Directors has declared a dividend of $0.60 per share. We believe that our approach ensures that distributions align with actual financial performance, maintaining a disciplined, transparent, and sustainable capital allocation strategy. Slide 13, please. This slide provides a clear overview of our top-line performance for the full year 2024 compared to 2023, as well as the quarter-by-quarter development throughout the year. The numbers illustrate how the strong markets in the first half of the year gave way to softer conditions in the last half of the year, impacting overall performance. Feedback rates remained elevated in the first half of the year, hovering above $40,000 a day. However, as we moved into Q3, rates started to decline, and this trend accelerated further in Q4. This reflects broader market softening due to the positive ton-mile impact from the Red Sea disruption, diminishing as crude tankers shifted back to dirty trades and the trade volumes on affected routes declined, effectively neutralizing the earlier gains. While fleet-wide rates declined by about 40% from Q1 to Q4, our TCE saw a smaller decline of 35%. This demonstrates the positive impact of our fleet expansion and operational efficiency. EBITDA amounted to $142 million in Q4, and as a reminder, everything else being equal, a change in daily freight rates of $10,000 translates into an EBITDA impact of approximately plus-minus $80 million for a quarter based on approximately 8,000 earning days in a quarter. This illustrates the significant earnings sensitivity to market movements, which is a key consideration for our financial outlook. Please turn to slide 14. Likewise, on this slide, we provide a breakdown of the quarterly development in net profit and key share-related ratios. A key factor to note is that the total number of shares increased by around 10 million over the year. The decline in freight rates has translated into a corresponding downward trend in net profit earnings per share and dividend per share. This is a direct consequence of the softer market conditions seen in the latter half of the year. As in previous quarters, our dividend policy remains unchanged. We continue to distribute excess liquidity on a quarterly basis while maintaining a prudent financial buffer. Our threshold liquidity level is determined by two key factors. First, a fixed liquidity requirement of $1.8 million per vessel and second, a discretionary element set by the Board. This discretionary component considers our capital structure, future obligations, and broader market trends to ensure a balanced approach to capital allocation. Consequently, the payout ratio for Q4 is 75%. Slide 15, please. As shown on this slide, vessel values have been on a steady upward trajectory over recent quarters but saw a decline in the fourth quarter to $3.6 billion with an average broker valuation down 4.6% relative to the end of 2023. In the chart in the middle, we highlight the development of our net interest-bearing debt which now stands at $948 million against $773 million a year ago. This increase reflects our fleet expansion over the past year. Despite this, our net loan to value remains stable at 26.8%, in line with the same quarter last year, ensuring a conservative financial foundation as we move forward. Additionally, in the chart to the right side, we provide an overview of the debt maturity profile. This year, we have only borrowings of $168 million maturing and committed to scrubber installations of $12 million. Beyond 2026, our obligations remain relatively modest until a larger loan matures in mid-2029. Overall, our financial position remains strong, allowing us to manage our commitments while maintaining flexibility for future risks and opportunities. And now, please turn to slide 16. As already shown on slide 12, based on the quarterly results, the Board of Directors has declared a Q4 2024 dividend of $0.60 per share, which corresponds to a payout ratio of 75%. Also on this slide, we provide a full overview of the key dates. The ex-dividend date for shares on NASDAQ Copenhagen is set for March 19, while on NASDAQ New York, it will be on March 20. The record date will be on March 20, and the payment date will be on April 2. And now, turn to slide 17. In the annual report that we have published this morning, we are taking a significant step forward in our sustainability reporting, placing transparency at the core to provide stakeholders with a clearer view of our priorities. With the implementation of the Corporate Sustainability Reporting Directive, we are refining how we communicate our corporate responsibilities. This framework strengthens our ability to report on material impacts, risks, and opportunities across environmental, social, and governance factors, and I encourage you all to have a look at this. Our approach to sustainability includes clear, measurable targets across safety, diversity, and carbon intensity reduction. Starting with safety, our key performance indicator is long-term accident frequency, which tracks accidents per 1 million exposure hours. In 2024, we achieved an LTAF of 0.42, and although this number is very sensitive to single accidents, we will continue working towards further improvements. On gender diversity and leadership, we are committed to increasing women in leadership positions to 35% by 2030. Lastly, on carbon intensity reduction, we are well on track. By the end of 2024, we reached our 40% reduction target, thus already now meeting the IMO 2030 targets. Looking ahead, we remain committed to our next ambitious 2030 goal of a 45% reduction, and ultimately to achieve net zero CO2 emissions from our fleet by 2050. Sustainability remains a core part of our long-term strategy, and we will continue taking decisive actions in these areas. We have set new ESG targets for 2024, reinforcing our commitment to reducing CO2 emissions, enhancing staff safety, and improving gender diversity in leadership. These actions demonstrate our dedication to making a changeable impact while creating long-term value for stakeholders. And now, please turn to slide 18 for the outlook. We forecast TCE earnings of $650 million to $950 million against the 2024 actuals of $1,135 million, and EBITDA of $350 million to $650 million against the 2024 actuals of $851 million. This reflects expectations of lower freight rates year-on-year based on current spot and forward market trends. Based on our rates and coverage as of March 3, 2025, we had fixed a total of 84% of our earning days at $26,612 per day in the first quarter across the fleet. Likewise, for the full 2025, we have fixed a total of 27% of our earning days at $28,916 per day for the full year across the fleet. And with this, I conclude my remarks and hand back to the operator.

Thank you. We will now start the question-and-answer segment. Your first question comes from Jon Chappell with Evercore. Please proceed.

Thank you. Good afternoon. Jacob, we've seen your strategy over the last three years with the elevated market, with the fleet replenishment, selling of the older vessels, even the dividend policy. As we enter this year, or I guess, we're well into this year at this point, with a lot more uncertainty, a lower starting point, how does that strategy change, if at all, as it relates to both operations and fleet evolution, as well as capital structure and capital return?

Thank you for the question, Jon. I will provide a more detailed response, but in short, there isn't any change. Regarding operations, as I mentioned in my prepared remarks, geopolitics and related changes remain significant, just as they have for the past three years. The key difference now is the speed at which we perceive potential changes. In this situation, an operational platform needs to be agile and prepared for all scenarios. I believe that the strength of an integrated company is crucial here, as it allows us to quickly adapt our operational setup. So, I don't foresee any changes there. As for our fleet, that's not been a focus in the presentation, but we're maintaining our current strategy. Recently, we sold three vintage vessels from 2005 in a market where liquidity has been lower due to uncertainties. We're committed to maintaining a fleet that aligns with the average age of the global product tanker fleet, capable of operating effectively until around the year 20 [ph]. This fleet strategy remains unchanged, and we're prepared to adapt to any opportunities that may arise. Regarding our financial strategy, again, there's no change. We've shown this by declaring a dividend of $0.60 for this quarter. I feel confident in our capital structure and leverage. We will continue to utilize excess capital for payouts. While there may be circumstances where share buybacks could be considered, that's not the case currently. It would require a very special situation for us to view that as a viable option. For now, you can expect continuity in our approach.

Thank you for that response. My next question is about the market. You talked about crude cannibalization and how that has shifted as we enter this year. Firstly, how does the current situation compare to the peak levels of crude encroaching on traditional product trades that we saw in the second half of last year? Secondly, is it becoming easier for crude ships to transition into the product trade? We had previously thought that it was difficult for crude vessels to make that switch due to the need for several voyages and the process of cleaning the cargo. Should we expect to see more back-and-forth movement between crude and product and the resulting impact and volatility moving forward?

Yes, I can address that. I've been in the product trading business for 15 years, and in shipping, we understand that crude tankers are designed to carry crude oil. While it's possible to transport clean products, ship owners and customers are cautious due to contamination risks that could devalue the cargo upon arrival. Over the past 30 years, we haven't seen a significant trend of existing crude vessels successfully transitioning to clean cargo, except for potentially a couple of voyages immediately after they come out of the yard as new builds. Currently, the dynamics around the Red Sea have created a new trade route for diesel between the Middle East and Europe, which began in 2022 as European needs shifted away from relying on Russian diesel. Additionally, we've seen a pattern where diesel is sourced from the U.S. into Europe, with Middle Eastern supplies replenishing the balance. However, early in 2024, a significant percentage of product manufacturers opted not to transit through the Bab el-Mandeb Strait due to safety concerns. This change caused the LR2 market servicing diesel to become comparable to Suezmax or VLCC vessels, as LR2s could save time by using the Suez Canal. As a result, transportation costs for LR2s became so high that traders began to view diesel as less risky regarding contamination compared to other fuels like gasoline or jet fuel. This situation demonstrates the importance of the trade lane and the size of vessels involved. Historically, we wouldn’t have predicted that crude tankers would enter the product trade without seeing something similar first, like reliable trade lanes developed between modern refiners and well-equipped receiving ports in Europe. Operational challenges related to cleaning remain, but while such a transition can happen under specific circumstances, it’s not something I would forecast broadly. Currently, we see that about 3% of clean petroleum products on the water are on VLs and Suezmaxes, down from 8% at its peak in September last year, which we consider to be a normalized level.

Great. That was all very helpful. I appreciate it, Jacob. Thank you.

Thanks Jon. Thanks for the questions.

The next question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Hey, guys. Good afternoon. Yeah, just a couple for me. Obviously, you've given a wide guidance range for the year. It makes sense, beginning or early in the year, and the spot market. And you outlined, all the geopolitics and a bit of the uncertainty. But just maybe, in terms of, say, seasonality, I wanted to get your sense of how you're thinking about that now. Any kind of ideas or how you think seasonality is going to play out here? Not perhaps throughout all of 2025, but maybe the first half. Is there anything that you could see at the moment that suggests there's a shift in how seasonality is going to be, given obviously, there's a lot of uncertainty and geopolitics probably factoring into the seasonality also? But just any sense of how you think the market's going to be shifting here in the coming months?

Yeah, I think we will have seasonality. I think that currently, we are more observant about the items that I described around geopolitics. I mean, another key that I think will impact our market indirectly is, of course, the OPEC+. We've not mentioned this. Some of these things will be a higher prioritization for us to try and understand what takes place rather than the seasonality, because over the long term, there is seasonality. But in the last years, it's actually different. And I don't have a particular view on how it will play out for this year, to be honest.

No, that's fair. I appreciate you providing some context. Since this is still fresh and early days, I would like to understand if the U.S. proposal to tax Chinese tonnage has impacted your business operations, particularly regarding how you allocate vessels in the U.S. market, whether you hold back Chinese-built ships, or if you are considering new builds. Has there been any change in your strategy as a result of this proposal?

That's a good question. If we look at the product tank market, about 26% of the total product is built in China, and around 70% of new builds may fit that category. As the proposals are released, we see that you can earn a fee based on your percentage on the 16 feet and your order book. For TORM specifically, we currently have a 41% ratio for Chinese built vessels after our latest sale, and we have no new builds. Overall, our current U.S. trade is approximately 20% of our total trade. This raises the question of whether the costs associated with a potential fee on our vessels would make sense or if we might redirect our vessels. At present, we don't have any plans to do so. I believe that our integrated platform offers us a high degree of flexibility in managing our fleet. Personally, I'd prefer to avoid this situation as it may be costly for refiners. However, how it all will unfold, particularly with U.S. volumes potentially decreasing due to uncompetitive costs in the global market, remains to be seen. We will adapt accordingly to navigate those changes.

Yeah. Great. Thank you, Jacob. Appreciate the comment. I'll pass it back.

Thanks.

Your next question comes from a representative at Clarkson Securities. Please proceed.

Thank you. I have a quick question about growth and fleet renewal moving forward. There seems to have been a significant change in activity compared to the last two years for your company and the market as a whole regarding PBL. How do you foresee this evolving in the near future? Should we anticipate that pair trading will dominate the landscape in the coming months, or do you expect to see larger transactions?

Thank you. Looking ahead, I believe it will depend on the circumstances. Reflecting on the liquidity in the secondary market for sales and purchases in the fourth quarter, it was considerably lower than what we have experienced over the past several years. The reality is that prices have now recalibrated to a historically healthy level, albeit lower than before. For the market and potential buyers and sellers, it’s essential to feel comfortable with this new level before transactions start to increase. A recent example is our sale of three vessels from 2005. Liquidity tends to return when the earning potential and prices adjust from where they were. If we are indeed at that point, I expect to see more agreement between buyers and sellers, which would lead to an increase in transaction volume. However, time will tell. I believe our market behaves similarly to the real estate market; when there’s a shock to house or apartment prices, those markets often slow down as people reassess what the new clearance price should be. It's quite similar in our industry.

Thank you, Jacob. That makes total sense. I'll return to the queue.

Thanks, Vendig.

Thank you. There are no more questions. I will now turn the conference back over to CEO Jacob Meldgaard for closing remarks.

Yeah, thanks to all of you for listening in to the presentation of the annual report 2024 for TORM. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.