TORM plc (NASDAQ:TRMD) Q2 2023 Earnings Call Transcript August 17, 2023
Operator: Hello, and welcome to the TORM plc Second Quarter and Six Months Ended 2023 Results Call. All line have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session [Operator Instructions] I will now turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead.
Andreas Abildgaard-Hein: Welcome to TORM’s conference call. We are pleased to have you with us and have been looking forward to presenting to you the results for the second quarter of 2023. We will refer to the page numbers that we present during the call. And at the end, you can ask questions if you’re attending the phone conference. If you are joining via webcast, you can have access — you have access to ask questions during the presentation as well. After this conference call, you will be able to listen to a recording. And as usual, you can find our presentations and other relevant data on our website. Please turn to Slide 2. Before we start presenting the results, I would like to draw your attention to the safe harbor statement. Please turn to Slide 3. Today’s presenters are as usual, Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle. Please turn to Slide 4. I will now hand over to Jacob.
Jacob Meldgaard: Thank you, Andreas, and good afternoon, good morning to all. Thank you for connecting with us for our second quarter 2023 result presentation. Today, we will present the strongest second quarter in our history, a quarter that continues the performance from the first quarter of this year. We realized a TCE of $308 million in the second quarter and an EBITDA result of $237 million. Adjusted for unrealized gains on FFA contracts of $37 million, our EBITDA result increased 23% to $199 million while profit before tax increased 72% to $184 million compared to the same period last year. Return on invested capital was 33.9% in the second quarter before correcting for unrealized gains on financial instruments related to freight and bunker.
And our balance sheet remains strong with a net LTV ratio of 29% and available liquidity of $497 million. This morning, TORM’s Board of Directors approved a dividend of $1.5 per share based on the second quarter, and we expect to distribute around $126.6 million here in September. In the first half of the year, we have taken delivery of all the seven LR1 vessels acquired in early January and the three MR vessels that we announced was acquired in March. We also sold and delivered one LR1 vessel with the fleet ending at 87 vessels at the end of June. During the second quarter, we entered into a collaboration with Seabulk to participate in the tanker security program led by the U.S. Maritime administration. It means that three of our MR vessels will participate in the program and undergo reflagging to the U.S., while continuing their regular operations under TORM’s commercial management when not operating under the tanker security program.
We expect this agreement to contribute positively to our earnings. As of 14th August, we have covered 74% of the third quarter at $30,534 per day, which is a reflection of the slightly lower market rates that we saw in the latter part of the second quarter as a result of refinery maintenance, product stock draws and slightly lower demand for products. As I’ll be explaining in a moment, we expect the markets to recover, and we expect a stronger fourth quarter. Now please turn to Slide 5. Since the start of the Russian invasion of Ukraine and the consequent introduction of sanctions against Russian oil products, we’ve seen a step change in product tanker freight rates towards a higher average level as sanctions have led to a recalibration of trade flows towards longer distances.
This has also brought along a higher volatility level as the product tanker fleet has moved closer to the point of full utilization where even small changes in the underlying demand and supply are creating high volatility in freight rates. In this environment of increased volatility, being able to position our fleet towards the premium trades and regions is even more important. And this means that having access to the right customers and the right cargo combinations is essential. We can see that we with our One Torm integrated platform continue to have strong support from our customers, and we remain confident that we will have access to the cargoes and trades that, in turn, enables us to position our fleet in the premium regions. Here, please turn to Slide 6.
When we look more closely at the main market drivers, the geopolitical conflict in Europe and the resulting EU ban on Russian oil products has been the most important demand driver side for 1.5 year now. As a result, the composition of EU imports has undergone a significant change from being mainly short-haul to being predominantly long haul. This has translated into a 40% increase in EU import ton mile during the post sanction period compared to the same period a year ago. And this is despite the fact that EU imports have been 15% lower year-on-year which was a result of higher imports and product stockpiling ahead of the sanctions as well as the fact that EU oil demand has seen some weakness so far this year. Similarly, Russia has been successful in redirecting its clean products to markets in North and West Africa, Turkey, Brazil, and Middle East and Asia against increasing ton miles.
Although here in the second quarter, we have seen some slowdown in Russian volumes due to spring refinery maintenance, which released part of the tonnage engaged in the Russian trade into the mainstream market, thereby putting a pressure on freight rates. Please turn to Slide 7. I’ve already mentioned that EU imports after the introduction of sanctions have been lower than usual, partly as a result of the stock building ahead of the sanctions which meant that a portion of demand was supplied by stockpiles instead of by imports. By now, the stockpiles have been drawn down to below average levels, hence, in the months ahead, this will give a tailwind to the product tanker market. As a consequence of low diesel stocks in Europe, the Middle East to Europe diesel arbitrage spreads have been recently widened to the highest level since the sanctions against Russia were officially introduced.
This is likely going to encourage increased trade flows, further amplified by seasonally increasing diesel consumption in Europe towards the winter months, which will be supplied by long-haul sources, hence, boosting ton miles. So China increased its export quotas that would be a further upside to the market. Please turn to Slide 8. We’ve already seen the product tanker market rebounding here in the first half of the third quarter with increased product flows out of almost all main exporting regions, encouraged by global, complex refinery margins reaching record seasonal levels. Underlying this development is the global oil demand scaling record highs, averaging an all-time high of 103 million barrels per day in June. And it is not only driven by China.
Also, oil consumption in industrialized countries has returned to growth. Subsequently, clean product volumes loaded on LRs and MRs globally have rebounded from the lower levels seen during the second quarter. Please turn to Slide 9. Further supporting the product tanker market is the fact that since the start of this year of 2023, a considerable number of LR2 vessels have switched from clean to dirty trades. This has reduced the clean trading LR2 fleet by a net of 9% with recent crude export cuts in Russia and Russian crude trading above the G7 price cap. However, this factor is not likely to provide further support to the product tanker market in the coming months. As Aframax rates have weakened significantly, we can potentially also see some switching back to the clean trades should these export costs stay for longer.
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And here, please turn to Slide 10. When we turn towards more fundamental drivers, not related to geopolitical conflicts, we have for some time been emphasizing the importance of the changes in the global refinery landscape with closures in some of the main importing regions and new capacity being added in exporting regions. Much of this new capacity is located in the Middle East and up until now has been slower to start up than expected. Hence, we have not seen the full effect of these new refiners yet. But it is important to mention that all these new refiners that are ramping up now. Furthermore, the new capacity is, to a large extent, concentrated around middle distillates, which we believe will be part of the higher long-haul diesel arbitrage flows that we expect for the coming months and years.
Please turn to Slide 11. And here, let me turn to the supply side drivers. After years of, you could say, subdued newbuilding activity, product tanker ordering at shipyards has picked up this year, and currently, the order book stands at 10% of the fleet. However, what is important to note here is that the current order book is spread across 3.5 years of deliveries. This translates into a 2.8% growth rate on an annualized basis. Also important to mention here is that with order books that shipyard filled up for the next 2.5 years, any new additional orders are to be delivered not before 2026. And furthermore, a number of the recent newbuilding orders has involved yards, which are really newcomers to the product tanker market. When we look at the fleet supply, in the second half of this decade, there may be even more availability for product tanker orders at shipyards.
Subsequently, we could see higher deliveries of newbuild vessels not least due to the need to renew the aging fleet. However, this will coincide with a significant increase in recycling potential as the fleet built in the 2000s is reaching their natural scrapping age. Consequently, the net fleet growth could even turn negative in the second half of this decade. Please turn to Slide 12. Another aspect important to mention in connection with the recent pickup in the LR2 ordering is that given the versatility of the LR2 fleet, we 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 11%, which compares with 5% of the combined fleet reaching 25 years old during the same period.
And if we consider that this segment normally has a lower average scrapping age which has historically been 21 years, then readily up to 23% of the fleet could be removed from the market in the next 3.5 years. Please turn to Slide 13. Now to conclude my remarks, on the product segment market, we see that the main demand and supply drivers on the product tanker market continue to be supportive. The trade recalibration that already started last year and that has led to a step change towards higher average freight rates will continue to support the market also this year with new large refineries ramping up in the Middle East being an important driver in this development. We are on track to reach the full trade recalibration effect, although we saw some fallback in the second quarter on lower trade volumes both into Europe and out of Russia.
So far here in the third quarter, we’ve seen trade volumes starting to rebound and key oil market indicators such as refinery margins and arbitrage spreads point towards further increases in trade volumes being transported over longer distances. As we also discussed, the positive demand side is complemented by a supportive supply side situation securing a low fleet growth for at least the next two to three years. With that, let me hand it over to you, Kim.
Kim Balle: Thank you, Jacob. Please turn to Slide 14. Focusing on our earnings development during the second quarter of 2023, we once again obtained strong performance. TCE increased to $308 million in the second quarter, which is higher than both the previous quarter and the same quarter last year. Sequential increase from the first quarter of 2023 is mainly due to unrealized profits from financial instruments related to freight and bunker of $37 million. Our EBITDA for the second quarter was $237 million including these unrealized gains. After adjusting for this, our adjusted EBITDA was $199 million. And over the past four quarters, we have achieved an adjusted EBITDA of a total of 920 or sorry, $[ 933 million ]. During the same period, TORM has declared dividends of a total of $578 million, including the dividend announced earlier today, while also increasing the fleet from 81 to 87 vessels and reducing our financial leverage.
Please turn to Slide 15. If we look at our largest vessel class, the MR class, they have performed strongly also when comparing to our peers. Including the latest four quarters, TORM has consistently outperformed our peers with an average rate of $33,862 per day, equaling a premium of TCE of $75 million. Needless to say, we are very pleased with this performance and see this as a validation of our business model and our One Torm platform prediction models consistent positioning of our vessels in the basins that give the highest earning. Please turn to Slide 16. If we dive further into the details of our TCE rates, the average rate for MRs for the second quarter were $33,862 per day; for LR1s $36,674 per day; and for LR2s $47,918 per day. The average across the fleet rate was $36,360 per day.
Based on our rates and coverage as of 14th August 2023, we have fixed a total of 74% of our earning days at $30,534 per day in the third quarter across the fleet. All of our vessels classes rates were on average around $30,000 per day. Hence, the softer market we saw towards the end of the second quarter will naturally have an impact in the earnings for the third quarter. Part of the mentioned coverage has been made with FFA contracts and as per 14th August 2023, the coverage for the coming quarters was [ 825 ] LR1 earning days fixed at approximately $45,000 per day and 1,478 MR earning days fixed on approximately $40,500 per day on average. In the second quarter, we had 7,398 earning days, and we expect to have 7,685 earning days in the third quarter based on full effect of the vessels acquired during the second quarter and taking into account that TORM Freya was sold and is expected to be delivered in the third quarter.
Please turn to Slide 17. We continue to evaluate our opportunities for fleet expansion and renewal. Thus, we have acquired and taken delivery of a total of 10 secondhand vessels in the first quarter of this year and has sold one vessel. This means that as of 30th June 2023, the value of the 87 vessels that we had in our fleet reached $3.1 billion, which is an increase of $875 million since the same time in 2022. The vessels acquired in the first half of this year alone have increased by 8% in value since we acquired them. The vessel value increase resulted in a net asset value of $2.5 billion at the end of June 2023, which is $1 billion higher than the same time last year. Since the end of the quarter, one vessel has been sold and is expected to be delivered in August.
Hence, by the end of the third quarter 2023, we expect to have 86 vessels in our fleet. As mentioned, we will distribute around $127 million or $1.5 per share based on our cash balance at the end of — cash balance at the end of the second quarter. Consistent with our distribution policy, our distribution is derived from the liquidity available for distribution, adjusted for a minimum cash reserve of $1.8 million for 87 vessels as well as cash reserved for future acquisition and restricted cash. Over the past 12 months, TORM has utilized the strong markets to strengthen our financial position while at the same time paying out a total of $578 million, equivalent to 74% of the net profit generated in the period. In the second quarter, we completed the refinancing of bank and leasing facilities for $480 million and further secured a $73 million facility that can be used for additional secondhand vessel financing.
After the completion of the refinancing, total debt increased by $70 million, of which $50 million are related to purchase of the three secondhand MR vessels that were delivered during the second quarter. Interest rate hedges cover 70% of the floating rate debt at a rate of 1.4% over the coming five years and combined with our fixed rate leasing, 83% of our debt is fixed over the coming years. Please turn to Slide 18. Summing up, the performance we delivered in the second quarter was historically strong compared to the second quarter results in the past. It is a reflection of a continued strong product tanker market and the largest fleet in TORM’s history that resulted in an increase of EBITDA of 54%. Recent softer markets have provided TORM with 74% coverage at $30,534 per day for the third quarter of 2023.
Thus, we expect the delivered result in the third quarter to be slightly softer than in the second quarter. However, market fundamentals and dynamics are pointing towards a stronger fourth quarter. We are both seasonally increasing demand. Lower product stocks and arbitrage spreads are supporting a stronger market. We are pleased that the strong earnings and balance sheet have allowed us for another quarterly dividend payout of $1.5 per share. And over the past year, the total dividend payment has reached $7 per share. All in all, our delivered results confirms TORM’s strong operating model consistently performs better compared to our peers. Thus, our MR fleet has outperformed the peer average with $75 million over the past year. We attribute this One Torm platform and our dedicated — we attribute this to our one TORM and our dedicated TORM employees.
And with that, we will let the operator open up for questions.
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