TORM plc Q3 FY2025 Earnings Call

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the TORM Third Quarter 2025 Results Conference Call. Thank you. I would like to turn the call over to Jacob Meldgaard, CEO. Please go ahead.

Yes. Thank you, and also welcome to everyone joining us here today from me. This morning, we released our interim results for the third quarter of 2025, delivering another strong set of numbers that underscore TORM's ability to generate market-leading performance. In Q3, we continued to operate in a relatively stable market environment despite ongoing geopolitical tensions. Freight rates firmed compared to the first half of the year, driving a TCE of USD 236 million, above the levels achieved in the previous quarters. This, in turn, resulted in a net profit of USD 78 million, enabling us to declare a dividend of USD 0.62 per share, clearly reflecting how stronger earnings translate into higher shareholder returns. Also, we advanced our fleet optimization strategy with the acquisition of 5 vessels: 4 2014-built MRs and 1 2010-built LR2, while divesting a 2007-built MR. We also agreed a 3-year time charter for the 2009-built MR vessel, TORM Lilly, to a European refiner at a daily rate of USD 22,234, thus above the prevailing market rate for such vintage. These transactions support our ongoing focus on maintaining a modern, high-quality and commercially attractive fleet. Looking ahead, while the macro environment remains dynamic and shaped by geopolitical uncertainty, market sentiment is broadly positive. We entered the final months of the year with solid momentum, supported by firm rates across all vessel segments and good visibility on our upcoming fixtures. Based on this and the coverage we have already secured, we further increased the midpoint of our guidance and narrowed the range to reflect a high level of transparency on earnings with relatively few uncovered days for the remainder of 2025. As always, we remain disciplined and agile in our execution. And with that, let's turn to the key market drivers and how we are positioned for the quarters ahead. Here, please turn to Slide 5. And let's start with a snapshot of the market landscape. Product tanker rates have remained both stable and attractive across the board. While recent figures reflect the onset of refinery maintenance season in the Atlantic and the Middle East, benchmark earnings for our MR and LR2 vessels continue to show resilience. This overall rate stability is supported by consistent demand and limited growth in the CPP trading fleet. Let's turn to Slide 6. As we've noted for some time, the low levels of East to West trade volumes observed earlier this year were unsustainable. Indeed, in the third quarter, trade volumes increased significantly, driven by higher middle distillate flows from East to West, supported by transatlantic movements. This lifted ton-miles well above the levels seen before the Red Sea disruption, while crude cannibalization stabilized at historically normal levels. At the start of the fourth quarter, trade flows have eased slightly as refineries in the West and the Middle East undergo seasonal maintenance. However, as maintenance concludes, trade flows are expected to resume, further supported by refinery closures in the West, which increase the need to source products from alternative locations. Please turn to Slide 7 to elaborate on that. And since the start of this year, 2 refineries in Northwest Europe have closed with 2 more scheduled to shut by end year. Together, these closures represent 6% of the region's refining capacity, reducing local product supply and increasing reliance on imported middle distillates in an already tight market. If this supply were fully replaced by imports from the Middle East Gulf, an additional 15 to 24 LR2 equivalents per year would be required, depending on whether vessels transit the Red Sea or sail around the Cape of Good Hope. To put this in perspective, this represents 6% to 10% of the current CPP trading LR2 fleet. Beyond Europe, 2 refineries on the U.S. West Coast, representing 11% of the region's capacity, are expected to close within the next 6 months. This will likely drive increased demand for gasoline and jet fuel imports, translating into a need for more than 25 MR equivalents on a round-trip basis if sourced from Asia. And here, I kindly ask you to turn to Slide 8. Geopolitical developments continue to be a key market driver. Since our last quarterly call, several new measures have emerged. While the duration of these measures remains uncertain, inefficiencies caused by the Red Sea disruption and sanctions on Russia continue to support the tanker market. Earlier this year, OPEC+ began unwinding production cuts, but the impact on crude tanker rates only became apparent at the end of the third quarter. We expect the positive effect of strong VLCC rates on product tankers to become more visible once the refinery maintenance season concludes. Sanctions against Russia have intensified in recent months. The EU import ban on third-country petroleum products derived from Russian crude, effective January next year, is not expected to significantly affect product tanker ton-miles as alternative sources are available at similar distances or could slightly increase demand if imports are sourced from further away. Meanwhile, intensified drone attacks on Russian refineries have reduced Russian clean petroleum product flows, boosting flows from the U.S. Gulf. Recent OPEC sanctions on Rosneft and Lukoil may further lower Russian crude exports. While the direct loss of Russian barrels is limited to the sanctioned fleet, replacement barrels from other regions would provide additional demand support for the conventional crude tanker fleet in an already strong rate environment, indirectly benefiting the product tanker market. Regarding U.S.-China reciprocal port fees, these are now off the table for another 12 months. While such measures could have added inefficiencies to the broader tanker market, TORM would have seen limited impact due to exemptions and the flexibility of our fleet. Finally, IMO's postponement of the Net-Zero Framework in October does not affect the market today, but signals that oil will continue to play a role in the maritime industry for the foreseeable future. Please turn to Slide 9. Let me turn to the tonnage supply side. This year's higher nominal fleet growth has been largely absorbed by a significant shift of LR2s into dirty trades as OFAC sanctions continue to limit the productivity of sanctioned Aframaxes. Over the past year, nearly 50 newbuild LR2s have joined the fleet, yet the number of LR2s trading clean has declined by around 10 vessels. As a result, total clean product tanker capacity has fallen by roughly 1% despite a 5% increase in the nominal product tanker fleet. Looking ahead, the relatively high order book for the next 2 to 3 years should be viewed in the context of an aging fleet. The average age is now at a 2-decade high, and the share of vessels approaching scrapping age is almost equivalent to the current order book. Furthermore, a significant portion of the older fleet remains under sanctions, which is expected to accelerate exits from the market. This is particularly evident in the combined LR2 Aframax segment, where 1 in 4 vessels globally is under OPEC, EU or U.K. sanctions. Kindly turn to Slide 10. To summarize, the key factors shaping the market this year are expected to continue into next year, including ongoing geopolitical uncertainty, the Red Sea disruption and sanctions on Russia. In addition, higher crude output from OPEC is indirectly supporting the product tanker market. On the demand side, oil consumption remains solid, and structural changes in the global refinery landscape continue to support ton-mile growth. On the supply side, a wave of newbuild deliveries will be offset by an increasing number of scrapping candidates and reduced trading activity among sanctioned vessels, factors that will influence overall tonnage availability and market balance. I'm confident that TORM is well positioned to navigate this environment of elevated uncertainty, supported by our strong capital structure, operational leverage, and fully integrated platform. And with that, I will now hand it over to Kim, who will walk us through the financials.

Thank you, Jacob. Please refer to Slide 12 for a summary of the financials. In the third quarter, we generated TCE revenues of 236 million USD, leading to an EBITDA of 152 million USD and a net profit of 78 million USD. Our fleet achieved TCE rates of 31,012 USD per day on a fleet-wide basis. When breaking it down by vessel class, LR2s earned well over 38,000 USD, LR1s around 29,500 USD, and MRs surpassed 28,000 USD per day. Compared to prior quarters, freight rates have strengthened, driven by robust market fundamentals. The rates we achieved demonstrate our continued outperformance against the broader market. Now, please go to Slide 13. This slide illustrates our quarterly revenue progress since Q3 2024. The results this quarter reflect a significant increase, contributing to the steady freight rates and earnings from previous quarters. This further emphasizes the favorable market conditions we are experiencing. We posted a strong result with TCE of 236 million USD and EBITDA of 152 million USD, which is 25 million USD higher than the previous quarter. This improvement indicates a 4,340 USD per day rise in fleet-wide TCE rates. With our current operational advantages, we are well positioned to capitalize on the attractive freight rates. Please turn to Slide 14. Here, we display the quarterly trends in net profit and key share metrics, which closely follow EBITDA trends. For the third quarter, earnings per share were reported at 0.79 USD. Our strategy regarding shareholder returns remains straightforward and consistent. We continue to return excess liquidity on a quarterly basis while maintaining a conservative financial buffer to safeguard our balance sheet. For Q3, we declared a dividend of 0.62 USD per share, yielding a payout ratio of 78%. This aligns with our free cash flow after debt repayments and reflects both our solid earnings and our dedication to responsible capital allocation. Please turn to Slide 15. Here, the broker valuation for our fleet was 2.9 billion USD at the end of the quarter, which showcases generally stable vessel values alongside slightly positive sentiment, contributing to a NAV increase of around 100 million USD to 2.4 billion USD. The central chart shows that our net interest-bearing debt is currently 690 million USD, equating to approximately 24%, similar to the level at the same time last year, highlighting the strength of our conservative capital structure. On the right, our debt maturity profile indicates that only 122 million USD in borrowings will mature in the next 12 months, with no significant maturities until 2029. This gives us extensive financial stability and flexibility. As mentioned in August, we secured an advantageous refinancing package to replace two syndicated loan facilities and our lease agreements. So far, TORM has repurchased 13 out of 22 leaseback vessels, and we have exercised two additional purchase options, with one vessel anticipated in Q4 2025 and the other in Q1 2026. The remaining vessels are scheduled for repurchase throughout 2026. Overall, our solid financial position equips us to adapt to current market conditions and pursue value-enhancing opportunities. Now, please turn to Slide 16 for the outlook. Our strong performance in the first three quarters lays a solid foundation for the rest of the year. As of October 31, we have secured 55% of our Q4 earning days at an average of 30,156 USD TCE per day. For the entire year 2025, 89% of our earning days are locked in at an average TCE of 28,281 USD per day. These figures provide clear earnings visibility and demonstrate ongoing market strength across our business areas. While geopolitical risks are present, market sentiment remains strong. As a result, we are confident in raising the midpoint of our TCE guidance by 25 million USD to 900 million USD, while further narrowing our full-year guidance. We now expect TCE earnings to be between 875 million USD and 925 million USD, compared to our previous estimate of 800 million USD to 950 million USD. Likewise, we have increased the midpoint and narrowed our EBITDA guidance to 540 million USD to 590 million USD, compared to the earlier range of 475 million USD to 625 million USD. This update reflects both our secured coverage and current market outlook while considering potential fluctuations. With that, I will conclude my remarks and hand it back to the operator.

Your first question comes from the line of Frode Morkedal with Clarksons.

Yes. I just read trade wins where you talked about a 2009-built MR charter out for 3 years at $22,000 per day, which is a fantastic rate, given the age, right? Basically, 3.5x EBITDA, as I see it. So the question is really how do you manage to pull that off and how repeatable is it to charter out for such long duration for that type of age?

Thank you for bringing that up. I mentioned it in my remarks earlier. There are two key points to consider. First, we can charter ships that are over 15 years old, and second, we are evaluating the number of opportunities available. Regarding the first point, our customers do not focus on the age of the vessels when they deal with us because our integrated platform ensures that all our assets maintain the same high standards. When it comes to human behavior and safety, the crew operating a ship built in 2009 is the same as that on a brand new vessel. Furthermore, all the efficiency measures we implement to standardize our vessels apply across the entire fleet. Therefore, I don't view this situation as unique; our customers expect TORM to provide consistent service regardless of the vessel's age. As for the opportunities available, we are currently in negotiations for several of our ships on longer-term contracts. Given the current market conditions, we are engaging in more discussions with customers about longer-term agreements than we were six months ago. However, we will only pursue these opportunities if they make financial sense, which is supported by the financial solidity that Kim outlined in detail.

It's interesting. Definitely, a 30% cash return on such a deal suggests that the value of the ships should increase. This leads me to my next question about your recent announcements regarding the purchase of four MRs and one LR2, as well as the sale of older ships. Broadly speaking, what was your thought process behind these decisions? Are you considering return hurdles, cash breakeven points, or potential time charter opportunities?

Yes, that's a great question. The answer encompasses all aspects. We don't focus on just one metric; it must meet our internal thresholds for what we consider a suitable internal rate of return and return on invested capital, particularly in volatile markets and spot operations. It must satisfy these criteria when evaluating asset acquisitions. I apologize for being repetitive, but our advantage lies in not being bound by vessel age or segment. Our primary focus is on ensuring that investments meet our return objectives, given the volatility of our business. Achieving a reasonable return is crucial for effectively utilizing our capital. Because of our platform, we can maximize value from various vessels, whether a 5-year-old MR or one aged 10 or 15 years, or from other segments. This flexibility allows us to explore more investment opportunities and analyze returns from multiple perspectives, not limited to one specific type of ship. Regarding your point about the five vessels we've acquired, each of them meets our return criteria individually. In contrast, the asset we sold had a net present value that suggested it was more beneficial to sell it than to keep it in our fleet, even though we were capable of doing so; we simply had a better offer than what our business plan projected.

Can you explain how the One TORM platform operates? Specifically, how do factors like intelligence and cargo opportunities contribute to achieving a higher Time Charter Equivalent compared to what competitors are earning?

Yes, I'm pleased to explain. Instead of focusing solely on the fact that we are chartering ships, it's important to consider the ships themselves and our integrated platform for hiring all our seafarers. This allows us to control which seafarers are assigned to which ships and at what times, ensuring quality and alignment on common goals, particularly the return on invested capital since our crew isn't driven by specific ownership structures in a ship management company. Everything is integrated. When we take over a ship, we typically carry out around 20 different investments to enhance the vessels for better fuel efficiency. Ultimately, customer dialogue determines pricing, but prior to that, our entire company collaborates to enable the chartering team to secure the best rates. This sets us apart from other business models where companies may primarily own the steel but outsource various functions. We manage everything in-house, which fosters a disciplined approach where everyone is driven by the same key performance indicators. I believe this is a key advantage for us. Additionally, being active in the right markets at the right times, positioning our fleet wisely, and using tools to assess optimal strategies for maximizing long-term earnings all contribute to our success. We believe the value of our platform is demonstrated in our ability to deliver TCE earnings that surpass those of our peers.

And your next question comes from Omar Nokta with Jefferies.

Good update. Obviously, very strong figures. I just had a couple of questions. Maybe just in terms of capital deployment, you bought the 4 MRs, the LR2. Those ships are somewhat older, but it looks like perhaps maybe they're in that sweet spot of return on investment. But I just want to get a sense from you, does this mark maybe a difference in how you're going to start deploying capital? Do you think going younger makes sense? Or is this the right age profile where we are in the cycle, and I guess, maybe where TORM is in its life cycle? Is this the right age to be going after at this point?

Yes. I think coming back to the right age is the age where you get the highest return on invested capital. We are not concerned about the age of these assets. Then we would obviously not have looked that way. So yes, I think it's absolutely the right thing. Could it be that we could supplement with younger tonnage? Yes. When and if the price curve gives us the opportunity to buy the right type of assets that are younger, we will absolutely look that way also, Omar. But for now, I feel very comfortable with the choices that we have made, and we are very open for business on any potential addition to our fleet.

Okay. Very good. And then, second question I have is on the dividend. It looks like you bumped the payout ratio from, say, 70% up to 78%. I know it's not a meaningful change, but it's noticeable. Anything you're willing to share in terms of how you think about dividends going forward from here? Do you want to keep it in that 70% to 78% range? Do you think it's more on the higher end going forward? Anything you're willing to share?

Thank you for your question, Omar. We addressed this in our last call, and at that time, we indicated we would reach our goal. I'm pleased to say that we have already achieved it this quarter. Our distribution policy isn't aimed at targeting a specific payout ratio; rather, it's designed to distribute the free liquidity we generate throughout the quarter. However, this is indeed linked to our cash flow breakeven levels. As these levels decrease—excluding the impact of net working capital—our capacity to increase payouts also improves. We hope to maintain our current payout level in the upcoming quarters, and I mentioned previously that a higher payout might be possible, but for now, we find the current levels very satisfactory. Our focus is on the free liquidity we generate, which informs our dividend proposals to the Board, who ultimately make the decision.

Okay. That's helpful. And then, last question, just in terms of the reported interest expense was a bit higher than the prior few quarters. I'm just wondering, is that an accounting treatment? Is that timing of a coupon payment?

No, it's related to the refinancing. It has to do with the accounting treatment of the refinance and the fees generated from it. You're just being informed.

Yes. Okay. So it smooths out kind of back to a more normalized level in Q4?

Definitely, we can have a talk about that, Omar, if you want some more details on that, but that's the accounting effect.

And at this time, there are no further questions. I will now turn the call back over to Jacob for closing remarks.

Yes. Thank you, everyone, for listening to the Q3 2025 report from TORM. Have a great day.

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