Earnings Call Transcript - TRMD Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the TORM First Six 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. Thank you. I will now turn the call over to Jacob Meldgaard, CEO. Please go ahead, sir.

Jacob Meldgaard, CEO

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 second quarter 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 $326 million and EBITDA improved to $251 million as freight rates remained firm throughout most of the quarter. Again, we witnessed a continuation of the market dynamics that we’ve seen in the previous quarters, i.e., geopolitical tension stemming from both the Ukraine and Russian conflict and the escalating confrontations in the Middle East that lead 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 are 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. This time, eight MR vessels to be delivered during the second half of this year for a total consideration of $340 million. The vessels have all been built at Hyundai Mipo Dockyard in 2014 and 2015, and six of the vessels have been fitted with scrubbers. And, as you would expect us to do when our vessels reach a certain age, we have divested one 2006-built MR tanker for delivery in the third quarter of 2024 for a cash consideration of $23.3 million. Thus, adding it all together, we are both expanding and replenishing our fleet. 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, TORM has declared a dividend for the quarter of $1.80 per share, thus adding to the positive dividend yield seen over the recent quarters. 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’re also seeing increased volatility in rates as the fleet utilization has moved closer to full utilization. The main impact of this view of these geopolitical tensions has been a reshaped product tanker trade towards longer distances. Meanwhile, overall trade volumes have risen supported by increasing oil demand and changes in the 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 Bab al-Mandeb 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. 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 timeline for disruption continues to be drawn out. In the second quarter 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 ton-mile demand for product tankers. At the same time, earnings for larger crude tankers have been subdued both seasonally and given the fact that VLCCs have not directly benefited from geopolitical drivers. This has led to a cleanup of a number of VLCCs and Suezmax since the end of second quarter. However, as we move towards the fourth quarter, 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. 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. 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-mile. This has been front-loaded, but actually more than what we had forecasted. What is important to mention here is that ton-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. 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. The combined order book is currently at 17%, which is equal to the share of the combined fleet being candidates for recycling. Furthermore, it’s important to mention that the current order book is spread over four years and with the increasing average delivery time, vessels ordered today will most likely not be delivered before 2028. When we look further ahead in time, we now expect the potential additional order for product tankers from 2028 onwards to be lower than our previous forecast. This is predominantly due to Chinese shipyards opting to build container vessels, LNG carriers, and other vessel segments where China has strategic import interest. 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 sanctioned or cabotage trade. Lastly, behind the geopolitical factors that have reshaped the 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. 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. 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.

Kim Balle, CFO

Thank you, Jacob. Now, please turn to Slide 12, for the financial highlights. In the second quarter of the year, our time charter equivalent earnings increased to $326 million, and based on this, we achieved $251 million in EBITDA and $194 million in net profits. When we adjust for the unrealized gains on derivatives in Q2 2023, the operating result is 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. It should be noted that spot rates were at a relatively high level in the first part of the quarter, followed by some retreat towards the end of the quarter as season disruptions started. Our fleet had a total of 7,749 earning days, which is a little higher than the 7,451 days we had in the same quarter last year. However, as previously mentioned, with LR2s accounting for a relatively higher part of the total compared to last year, we believe these are strong numbers and together, they reflect a very satisfactory performance enabling us to realize TCE rates per day that have increased by $5,700 compared to Q2 2023. Further, the results we have produced translate into a return on invested capital of 29.5%, thus underscoring the positive environment in which we are operating. 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 we remain firmly committed to returning a significant part of our earnings to our shareholders. On Slide 13, the chart in the upper left illustrates how vessel values have increased over the previous quarters leading to a total value of $3.7 billion, 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 lower left corner that developed in our net interest-bearing debt, which now amounts to $737 million that’s $157 million lower than a year ago. 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. However, when subtracting the declared dividend for Q2, then it would be around 25%, but continuing the quarter-by-quarter decline in financial leverage. On Slide 14, we have made an overview of per share development in recent quarters. The result we announced today translates into an EPS of $2.08, significantly higher than the same quarter last year. The share count has increased by 10 billion shares over the period since last year driven by our partly 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 $2.80 per share, thus marking the dividend by $0.30 per share compared to the same quarter last year. On Slide 15, this slide gives you the full overview of the dividend distribution and the key dates to observe. The ex-dividend date for the shares on NASDAQ Copenhagen will be on 28th August and for the shares on NASDAQ New York on 29th August as shares are now trading T+1 in New York, but otherwise the same process as usual. On Slide 16 for the outlook, based on the satisfactory results we have published today and the coverage we have for the third quarter of 2024, we increased the low-end of our guidance range by $50 million, thereby narrowing the guidance range reflecting the increased transparency on full-year numbers. Thus, we expect TCE earnings for 2024 of $1.15 billion to $1.35 billion and EBITDA of $850 million to $1.50 billion. The table shows that we in the third quarter of 2024 expect to have 7,859 earnings days, and as of 12 August 2024, we had faced a total of 64% of those at a fleet-wide rate of $38,340 per day. Further, for the full year, we are now at 68% coverage at a fleet-wide rate of $42,205 per day. 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&A session. Thank you.

Operator, Operator

Thank you. We will now open the line for your questions. Our first question comes from Jon Chappell with Evercore. Please go ahead.

Jon Chappell, Analyst

Thank you. Good afternoon. Jacob, I hate to start with a big macro one. Seasonality makes complete sense. We’ve seen it many years. I think your chart that explained the crude and product was very interesting. But, there is a little bit more 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 third-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?

Jacob Meldgaard, CEO

Yes. Thanks, Jon. 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 it’s something more fundamental. 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 three or four years ago, which would be a transformation of the underlying economies away aggressively from fossil fuels. I think that has, that’s not what I’m looking at right now. 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 then looking back, as I say to ‘23 numbers, it was exactly the same price mechanism in month.

Jon Chappell, Analyst

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, giving you some optionality and flexibility with the fleet. If I go back and look at the 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 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.

Jacob Meldgaard, CEO

No. Clearly, the markets, I would say, are not reflecting that there is this bump, speed bump, you could say currently. I think we are going to take it really opportunistically. Currently, we are of the expectation that this is a seasonality and that they will come back. I think that’s the time to actually make those calls rather than in the current environment.

Jon Chappell, Analyst

Okay. Makes sense. Thank you, Jacob.

Jacob Meldgaard, CEO

Thanks. Thank you. Thanks for those questions, Jon.

Operator, Operator

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

Omar Nokta, Analyst

Thank you. Hi, Jacob, and Kim. Good afternoon. Obviously, nice earnings as usual and wanted to maybe piggyback a little bit on Jon’s first question. Obviously we’re in a very strong market. Things have clearly cooled off a bit. They remain elevated definitely from a historical perspective. And, I guess there’s been some talk of refinery run cuts in Asia, and just wanted to get a sense from you if you feel like the spot market or the charter markets as they are today are reflecting that already? And then do you see risk, are you seeing signs that refinery run cuts will be coming into the Western Hemisphere as well?

Jacob Meldgaard, CEO

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 has 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’re 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 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.

Omar Nokta, Analyst

Okay. So, it sounds like, effectively, then the market has been reflecting this for some time. A couple 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. You mentioned that the 68 scrubbers that are installed on your fleet of the 85 planned. 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?

Jacob Meldgaard, CEO

Yes. So, our plan is currently intact, and it will be, as you say, also done in the ordinary course of business. That’s a mix of some of the acquisitions we’ve done over the last couple of years where it still makes financial sense. Of course, we will do it case by case until we 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. 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.

Omar Nokta, Analyst

Okay. Great. And then just a final one regarding the dividend. I think this one, it’s 87% of earnings this last $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 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?

Jacob Meldgaard, CEO

Yes. It’s always been up to the board for its discretion in 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 whatever we earn or we generate of liquidity from the 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 those dividends or distribute. So, it’s the same thinking, but of course, if the board teams together with management that we should have another calibration of the defined dividend, we could do that. But in the outset, it’s the same way we are thinking. We just take the net cash generation per quarter, then we that’s the offset for us that we will distribute that. We have not changed it per se over the quarters the last many quarters.

Omar Nokta, Analyst

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

Operator, Operator

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

Clement Mullins, Analyst

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. 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?

Jacob Meldgaard, CEO

Okay. Thanks for those questions. I think I’ll start with Chinese demand for products. There are, as you point to a number of factors that are impacting how the Chinese infrastructure is developing both on EVs adaption 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 flows. 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 in or out of the refineries. And there, everything being 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.

Clement Mullins, Analyst

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

Jacob Meldgaard, CEO

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

Operator, Operator

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

Peter Hagen, Analyst

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

Jacob Meldgaard, CEO

Yes. I think you are right on, we did do that, Peter, during the quarter restart. And LR2 took three 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 call. Yes.

Peter Hagen, Analyst

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 break spot still?

Jacob Meldgaard, CEO

We’re happy either way. So obviously, we believe 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 either-or also given the number of assets that we’ve got that I think we can play both sides, Peter, on that. But the current levels are, in our opinion, attractive enough to also engage in. Yes.

Peter Hagen, Analyst

Okay. Thank you. And a second question for myself. In terms of your presentation in Slide 8, you’re here showing, well approximately 8 million 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 or what given the LCCs are doing, clean trade – product tanker trade.

Jacob Meldgaard, CEO

Thank you, Peter. No. That’s a good observation. Good question. So, this is the here now, this is what we see, the portion of crude tankers that have migrated and you can say, in force, 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 this trade once you see a seasonal pickup also in the VLCC and in the Suezmax trades. So, this is what we can identify as vessels that are carrying key petroleum products as we speak.

Peter Hagen, Analyst

And just as a quick follow-up on that, speaking for myself, I was pretty surprised when I heard about all those VLCCs 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?

Jacob Meldgaard, CEO

Yes. For us, it's not unexpected that the VLCC market is currently offering around $25,000 for a VLCC, while LR2s are trading at 50, allowing for optimized earnings on the VLCC to about 40. This makes sense to me. However, if the LR2 market is at 30 and the VLCC is at 25, it wouldn’t make sense to pursue LR2 because it's not economically viable. There was a period when VLCC rates presented an opportunity, but even now, the rate differences aren't compelling enough to switch to that market as the alternatives to VLCC are not appealing right now. This shows that crude and product are not completely separate markets. If there's no VLCC market, VLCCs will try to enter the CPP market if those rates are favorable. Essentially, a significant disparity, like three times LR2 compared to VLCC, would create an incentive to pursue LR2 over VLCC for a better TCE. It’s important to recognize that there’s a limit to how high LR2 rates can rise on their own over time. If VLCCs are trading at 50, then suggesting LR2 could also be at a high rate seems unrealistic.

Peter Hagen, Analyst

Yes. Thank you. 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 being accepted by the cargo owners to actually trade the fleet. But fully agreed and understood, in terms of economic incentives. Yes. Thank you.

Jacob Meldgaard, CEO

Thank you, Peter. That’s a good question. Thank you.

Operator, Operator

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

Jacob Meldgaard, CEO

Okay. Thank you very much for dialing into the second quarter of 2024. Have a great day.

Operator, Operator

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