TORM plc
Q4 2021 Earnings Call Transcript

Published: 2 Mar 2022

[Operator:]

Ladies and gentlemen, thank you for standing by. I am Natalie, your conference call operator. Welcome and thank you for joining TORM plc Fourth Quarter 2021 Results Call. . I would now like to turn the conference over to, Andreas Abildgaard-Hein Please go ahead.

[Andreas Hein:]

Thank you. And thank you for dialing-in, and welcome to TORM's conference call regarding the results for the fourth quarter of 2021. My name is Andreas Abildgaard-Hein and I'm Head of Investor Relations in TORM. As usual, we will refer to the slides as we speak. And at the end of the presentation, we will open up for questions. Please turn to slide 2. Before commencing, I would like to draw your attention to the Safe Harbor statement. Please turn to slide 3. The results will be presented by Executive Director and CEO, Jacob Meldgaard, and CFO, Kim Balle. Please turn to slide 4. I will now hand it over to Jacob.

[Jacob Meldgaard:]

Thank you, Andreas, and good afternoon. Thank you all for dialing in. I'm pleased to be here today as we've now publish our results for the fourth quarter of 2021. And although the market is still challenging due to the continuing stock fall, we did see signs of market recovery already here in the fourth quarter of 2021. And we ended with an EBITDA of $42.9 million, and we had a loss before tax of $8 million. The return on invested capital ended at 0.8%. The first thing that here we realize an average TCE rate of close to $14,000 per day, our largest segment, the MR segment achieve rates of $13,329 per day, whereas LR1 and LR2 segments obtained rates above $15,5 per day. Here now looking into the first quarter of this year we at this stage, we've seen a further recovery and the bookings we've secured is around $15,500 per day. And here once again, we have outperformed peers in the largest segment in the MR. Now early part of this year, we did close the last of the sale and leaseback of nine months that we entered into late in Q3 last year on attractive terms and thereby we have been securing a solid liquidity base and obviously also optionality during and at the end of these leasing periods. In the fourth quarter of last year, we also increased our scrubber commitment to 57 scrubbers thereby increasing our access to lower fuel prices in the current quite volatile and uncertain market. Now, kindly turn to the next slide to slide 5. The product tanker market as I said remain challenged here in the fourth quarter. Oil supply remained insufficient to keep pace with the demand recovery, and therefore, logically, inventories continued to drop. The market here in the Western Hemisphere was nevertheless supported by US Gulf refiners that they came back from after the outages related to Hurricane Ida. And it also coincides with strong import demand from South America and with Africa. On the other hand, we did see the market in the eastern hemisphere were negatively affected by low product exports especially from China. Here at the start of the first quarter, we've seen that there was disconnect between the traditional rates with LR rate especially in the east, falling actually below the MR earnings. And this mainly reflects that there has been a lack of trade on the traditional interface and LR routes as a consequence of tight product balances in both East and West. While what we experienced on the MR rate is that they had continued support from robust freight growth within the Atlantic basin. And also with foreclose into is basically Australia. Slide 6 please. Clearly, we're looking at the market. The past week has been an extreme weekend when we look more at the current prices caused by the Russian invasion of Ukraine and the consequent sanctions on Russia. This has increased uncertainty on the energy markets overall, and it has sent the price of crude as we all can see, to the highest level now in 14 years. Now, sanctions themselves enforced so far by Western countries are not directly targeting the oil trade, but the uncertainty and reluctance to transport and also to trade Russian oil has sent the crude tanker freight rates in the European market to the highest level seen since the beginning of the COVID-19 pandemic back in spring of 2020. And the product tanker market will also now over the past 48 hours started to see increased demand for middle distillate moving from the Middle East to Europe. And activity in the US Gulf has been increasing for the past days. So right now MR earnings have climbed in the US about $20,000 today, and in the Middle East LR rates look to have taken a step up from the low $10,000 per day to around $30,000 today, if you have a modern scrubber fitted vessel in the trading window right now. Given the proximity of Russia to Europe, any rerouting of freight flows is most likely to involve or close over longer distances. So increasing the ton mile demand for tankers. For example, if we look at Northwest Europe, import diesel from the Middle East, instead of Russian 40 ports, it would increase the ton mile for the same amount of fuel by around three times. Obviously, right now, the developments are unfolding. There is a high complexity around this very unfortunate situation. It is too early to say what the impact will be in the medium term, but right here and now clearly the markets are up. In light of the Russian invasion on Ukraine, we have decided into not to enter into any new business that involves Russian ports. And we have also decided not to enter into any new agreements for Russian accounts. Please turn to slide 7. We've been discussing and underlying for some time that artificially low food or supply and the resulting inventory drawdowns have kept tanker markets rate at the subdued levels throughout the past 18-months if we look away from the events of the last week. The recovery in global oil demand has not been met by a corresponding increase in oil supply. And this has resulted in a situation where oil inventories have simply continued to be brought down, and in some regions to levels which are below pre-COVID lows. With the seasonal slowdown in oil demand at the same time, as OPEC continues to add barrels to the market. The supply demand balance is expected to turn over the first quarter of this year, if we assume that the Russian oil output is not materially affected by the current crisis. Further the Russian Ukraine crisis and consequently record high crude oil price, reflecting oil supply concerns could potentially also accelerate a nuclear deal with Iran. And as a consequence, up to 1.3 million barrels per day of Iranian barrels could be added to this market or potentially traveling longer distances than any last Russian European oil flows. At the same time, the lifting of sanctions on Iran could and in our opinion would accelerate scrapping of older crude, which is currently used to transport sanctions Iranian crude hence affecting the tonnage supply side positivity as well. Please turn to the next slide, slide 8t. And here, let me sum up the main demand drivers influencing the tanker market, we can see that significant progress has been made not only from the peak of the COVID-19 crisis, but also from where we stood a year ago. And although in many cases, we are not back to pre-COVID-19 levels yet, the outlook for the next 12-months indicates further improvements, at least due to the continuing oil demand recovery. Although at higher oil price, this environment could potentially destroy some of the demand that we're seeing if prices on oil will continue to increase. Now, in addition to all of this, OPEC have decided and are continuously sticking to their plan of increasing the crude supply. And we expect that this will also support global refinery at large in the coming months. Here it should also be mentioned that with inventories now being drawn down to these low levels. They need to be built up again at some point and which then will act again as a tailwind to tanker demand in addition to some of the other factors I mentioned more normal trade flows and potentially longer ton mile for the substitution of Russian oil. Please turn to slide 9. If we turn to more medium and long-term demand drivers, the COVID-19 pandemic has accelerated the pace of refinery closures, with more than 2 million barrels per day of refining capacity already having closed down permanently and a further almost 0.5 million is scheduled to close down during this year and the next year. On top of that another 1 million barrels per day of capacity could risk being shut down. Most of the close capacity is located in regions which are already large importers of refined oil products such as Europe, US West Coast, US East Coast, Australia, New Zealand and South Africa. At the same time, more than 4 million barrels per day of new capacity scheduled to come online mainly in the Middle East and China region, which already today a large exporters of oil products. Both these developments are positive for trade flows and ton-mile in the coming years with only a few products projects, which are less positive for trade. Here, Australia is a good example of a country where two out of the four refineries closed down during 2021. And refined oil for US exports for the year average is already 13% higher than in 2019 even though oil demand in the country stayed at 11% below the 2019 level at the same time. And here kindly turn to slide 10. And just for reference, kindly utilize the presentation that is available on our website, rather than the presentation going live here. And in the presentation on our website, please turn to slide 10. The positive outlook for demand for product tankers in the next three to five years coincides with the supply side, which is the most supportive for at least the past 25 years. With record high new billing prices, limited shipyard availability tank ordering remains muted here in the fourth quarter of 2021. Consequently, the order book to feed ratio for product tanker is continuously at a historically low level of 6% further supported by similarly historically low 7% order book to feed ratio for crude tankers. Further, we've seen surge in scrap prices. This is incentivized scrapping of product tankers with the highest level of tonnage removed from the market in 2021 since 2010, these two drivers support the case of a very modest fee growth over the coming two to three years, which we expect to be around 2% a year, only half the pay seen in the past five years. Now to conclude my remark here on the product tanker market, we expect volatility on the market now due to the Russian invasion in Ukraine, with the potential for ton-mile increases due to crude and oil products trade rerouting, continuing improvements in the global oil demand, increasing OPEC supply, as well as the need to rebuild depleted crude and product inventories support the tanker market here. And over medium and long term, the refinery dislocations, the low order book add an extra support for our markets. Slide 11. Now looking at our commercial performance, here, I'm proud that once again, TORM has outperformed its peer in 26 out of the last 28 quarters in our largest segment MR. And here in the fourth quarter of 2021 we achieved rates of $13,929 per day. And, again, I can only congratulate everybody on the one TORM platform in our organization, whether on board or ships or in our offices that we continue to deliver these our performance on a day to day basis. Please turn to slide 12. One of the deciding factors for us when we are achieving our above average TCE revenue this is driven by our continued focus on the positioning of our fleet in the basins where we have the highest earning potential and here in the fourth quarter of 2021, we had in TORM and overweight , where we also saw and outperformance when looking at the full quarter. Now with that, let me hand it over to you Kim to further elaboration here the cost structure, the liquidity position and also

[Kim Balle:]

Thank you very much, Jacob. So please turn to slide 13. At the end of 2021 we have as Jacob mentioned seen a recovering in tanker market with rate reaching just below $14,000 a day in the fourth quarter of 2021. And a further increase going into Q1 of ‘22, where we fixed 85% of our days at $15,569. In the fourth quarter of ’21 and in 2021 as a whole, our operating expenses increased mainly due to COVID-19 related expenses. So when we correct for these expenses, our OpEx was slightly lower than the pre-COVID-19 levels of $6,354 a day compared to $6,371 in 2019. We will maintain our focus on cost optimization without jeopardizing quality and customer focus. Please turn to slide 14. Early in 2020 to TORM reached the largest fleet ever with 85 vessels across the main tanker segments at total of $320 million was invested in new and secondhand vessels in 2021. Whereas we sold one vessel, which was delivered to the buyer in 2021. We recently sold two older vessels with expected delivery in the first half of 2022. They were at attractive prices. So our expansion of the feed was done while maintaining and conservative debt structure and keeping a strong cash position. Early in 2022, we ended our new billing program by taking delivery of the last of the two outstanding LR2 scrubber fitted vessels. So we're now ready to take advantage of a potential market recovery. Please turn to slide 15. As of 2021 TORM had available liquidity of $210 million, cash total $172 million and we haven’t the undrawn credit facility of $38 million. The total cash CapEx commitments related to our new buildings and scrubbers were $48 million as of 31 December 2021. With a strong liquidity profile, the CapEx commitments are fully funded, and we have a significant liquidity ratio. Please turn to slide 16. Looking at our debt maturity profile, we have no major refinancing until 2026, which combined with our strong cash position provides strong with financial and strategic flexibility to pursue value enhancing opportunities in the market should they occur. As it fully displayed we do not have any major repayments until 2026. Further in the fourth quarter of 2021 and early 2022, we have increased our inter freight rate system 90% in the coming three years and 85% from three to five years. Thereby we have prudently taking out the potential interest rate risk caused by the increases we've seen in inflation levels recently. Please turn to slide 17. Regarding metrics such as net asset value and loan to value, the value of TORM vessels including new buildings was approximately $1.9 billion by the end of the fourth quarter. Outstanding gross debt amounted to $1.148 billion as of 31st December 2021. As mentioned TORM sale leaseback of 90 mile vessels ended up adding $74 million to the outstanding. With limited committed CapEx and a solid cash position we have a net LTV of 52%. So all-in-all, we have a strong and attractive price structure, with reputable banks and leasing institutions. And we have hence demonstrated our strong access to diversified funding sources in the market. And we are very satisfied with our situation. The net asset value was approximately $1 billion as of 31st December 2021. And that corresponds to $12.5 or DKK82 per share. And I just take before we started this call, where TORM shares, sure you all know it and follow it was at DKK52. So I am in conclusion pleased that our conservative balance sheet supports our strategic flexibility as well as our financial strength. With that I will let the operator open up for questions.

[Operator:]

And the first question is from the line of Jonathan Chappell from Evercore.

[Jonathan Chappell:]

Thank you. Good afternoon. Jacob, if I could start with you kind of a two parter on the market. Want to re-ask the question I probably asked three months ago which is we lay out such a favorable inventory situations such a favorable supply, side demands recovering, OpEx producing just kind of your views on why we've yet to see event less increase, substantial increase in the markets and maybe my second part to that is it was noteworthy to me that you called out Iran and OPEC, the Russian Ukraine, a lot of things that impact the crude markets. So do you feel that you really need a crude market recovery before the product or even at the same time as a product tanker recovery or can one do better without the other?

[Jacob Meldgaard:]

Okay, Thanks Jon and good morning. So I think we probably need to like pretend that we have a world where the current crisis is not affecting the market then we fundamentally sitting last Wednesday, where we had a discussion with our Board of low likelihood of worsening crisis in Ukraine, which within 24 hours after that discussion proved to be wrong. But let's just if we pause and sort of set the time there, and I will say that what we experienced on to that time is that inventories were actually still drawing rather than building and that OPEC were under delivering on the needs of the world. And clearly, oil prices, even without Russian invasion of Ukraine have been creeping up over the past 12-months. Of course, also, because of this acute answer, in terms of ramp up production by OPEC. Now, that all leads me to the what we have been experiencing is that crude tankers have still, up until this, let's say we could go up in cannibalizing into the product tanker space, leading also to what I described before around, you actually had this rather unusual situation with the largest ships turning significantly below in the spot market, what a massive LR2 significantly lower than the MR. Also, because of this cannibalization, I believe that fundamentally we need to that situation to change before you will see a real recovery in product tanker rates. That is my thing. Now, fast forward, now one week later, the world has, I think dramatically changed, because the whole ecosystem of crude and also refined oil products is right now under change. Because of that, ship owners, all traders and end users in general are taking a position generally to be very careful or even shying away from trade with Russian oil and or transportation of the same oil. And that is changing the landscape. And as we speak freight rates for crude tankers been going up. And it is also spilling into our segments LR, MR and the rate environment is today higher than what we have seen since early part of 2020. And it is also weighing the forward curve significantly. So let's say a week ago, and LR2 could make probably $5,000 per day. Today, what is being discussed is a rate environment in the low 20s. And if you add the scrubber premium, which is clearly going up, and it's probably around $1,000 on an LR2 today, then you add 30 and it was five. So it's a significant step change.

[Jonathan Chappell:]

Yes, that's true. And that scrubber premium. You're right. That's something that some good optionality, super quick one for you, Kim, I was looking at the debt repayment schedule on slide 16. The $188 million kind of stood out to me. So I went back to look at your third quarter presentation and it was only $133 million. So it's up $55 million for this year. $12 million of that is the lease financing, which makes sense given the closing of the remainder of the sale leaseback transaction, but the debt, mortgage debt went up about $33 million as well, what was the reason for that kind of reset the repayment profile in this year?

[Kim Balle:]

Yes, you are sharp as always, Jon, it is, we simply we have the RTF that we had on drawn and we tend to just draw it, it is basically equal to cash, but we decided to draw it so it is cash at hand and we can have it there or we can redeem the RTF once again. So that's the reason.

[Jonathan Chappell:]

Okay, and then just the final one, if I can slip one more in, you announced two more vessel sales make sense asset values keep going up while the market remains relatively nailed to the bottom. Any more thoughts of kind of playing that asset or so to speak, monetizing today with probably some of the older vessels? Before the rate environment kind of takes off?

[Jacob Meldgaard:]

Yes. Good point again, and we will subscribe to that currently that up is open, and we are pursuing a couple of similar deals like the ones we've just done. So yes, that is definitely high on the agenda.

[Operator:]

The next question is from the line of Anders Karlsen from Kepler Cheuvreux.

[Anders Karlsen:]

Yes, good afternoon, gentlemen. Just a little bit back to the market. I mean right levels are making up but are you seeing actual fixtures yet or is it just hearsay numbers?

[Jacob Meldgaard:]

So, Anders, that's a good question, as I say, it has already proved to be real fixtures, especially in the crude FMX segment. And there we are seeing elevated fixtures being concluded, of course, also in the largest segments in but so far, this is what is driving up also the LR2 rates that has been quoted, but it is within the last 24 to 48 hours. So it's pretty new, let's see where it settles, but there is a strong push on rates being quoted right now, but nothing concluded.

[Anders Karlsen:]

Okay. That’s just interesting, in terms of, if how and I don’t know this is, if sudden done on all things changing every moment. Now, if you were to replace the Russian diesel volumes to Europe. Is there sufficient capacity in other regions to fully replace that on quick note or do you think there's going to be a time lag too to do so.

[Jacob Meldgaard:]

So that is a very good question that we also obviously looking into, because for the refined for Russia, the impact on Russian oil is a, crude and then b, diesel. And we will say that Russia would need to find new markets for the products that they are currently exporting into Europe, and let's say the countries that are currently shying away. So if I take it in a simple manner, if we started with crude, clearly today, the biggest buyer of crude from Russia, one of the big is China. And you could expect, what we're seeing is China is publicly articulating that they will not put sanctions on Russia, they have also taken some of the Russian controlled tonnage on charters of Unitec clearly signaling that they will continue to trade flow on crude between Russia and China. And I think that there is a relatively high likelihood that it will increase from what it was a week ago. And there's nothing that would indicate anything different, then the question is obviously, what will happen, then, with the volumes of diesel that is currently produced in Russia and being exported to Europe? What is the new home? And I don't have the answer yet. But our opinion would be that some of it would flow to South America. And other part of it would flow to West Africa. And that would sort of make room for other diesel volumes that would normally go into those areas, to then go into Europe, for instance, US volumes that would no longer go to South America or with Africa, but they will be incentivized to sell into Europe to have a redistribution with longer ton-mile of the same volumes. That's our main -- that's how we think that it could play out. The alternative is obviously that Russian refiners are no longer producing. I don't think that is -- that seems to be somewhere down the road because it's not in there. I mean, their motivation would clearly be even if they need to sell at a discount to other market participant would be to continue the flow.

[Anders Karlsen:]

Yes. I think it's an underlying so I'm thinking to myself, so one last question. It's on the refinery shutdowns. You're not listing any refinery shutdowns in China, but my understanding is that some of the new refineries may replace all the old ones. And that’s what you're thinking or do you think it's just going to be all refiners are going to continue as they do today?

[Jacob Meldgaard:]

Yes, good point. So the way we have describing rather than having the gross new, and the course closure, we have netted it out in the description that we have on the slide. So you see there, that we have said that the refinery addition for the years $0.22 three in China is about a million barrel per day. And that is net. So there you have more additions, but you also have closures. So that's the net addition.

[Operator:]

The next question is from Climent Molins from Value Investor's. Please go ahead.

[Climent Molins:]

Good morning. You conducted several acquisitions during 2021. So, could you provide some commentary on your appetite to continue expanding the fleet? Are you seeing any attractive opportunities?

[Jacob Meldgaard:]

Yes, we are constantly obviously, following the opportunities that is in the market. And let's see is a very volatile market that we have entered into. So time will tell but we are always open for the type of opportunity that we saw last year. So one as you point to, we did shared based transaction to acquire chemical tankers from incorporating the team tankers, and b, we did enter into an agreement to buy not new, but relatively new tonnage in the LR2 segments. So, these type of fields would be examples of some that we are still interested in adding to the portfolio, I have nothing concrete at this stage.

[Climent Molins:]

Right, make sense. The current environment is disturbing the positive impact vehicle component and scrubbers and relative performance. Within of premium, are you able to skew in your modern assets versus the older ones? And regarding Q1 guidance, could you approximately quantify the positive effect of scrubbers?

[Jacob Meldgaard:]

Yes, so a, on the modern versus old, actually we have alternates in our fleet there have scrubber where the economics is the same as a modern vessel. So I'm not really seeing a discrepancy in terms of this, it is small characteristics around and other things relative to whether it is young or old that is dictating the earning potential. Now, on the scramble currently, as I mentioned the scrubber premium right now, in Singapore, the spread is close to $300 between high sulfur and low sulfur, it is only at the very beginning of the IMO2020 implementation back in early part of 2020 that we have seen this and if you use that as your calculation, then we estimate that LR2 are currently, right now in that area of the world having benefit of around $7,000 to $8,000 and LR1 $5,000 to $6,000 and MR. $3,000 to $4,000 higher earning potential, but this is very lately that we have seen is only over the past week has the level gone come to that.

[Climent Molins:]

Right, that's helpful. And final question for me, you have a dividend policy of distributing 25% to 50% of net income as dividends, but the shield line term is trading at a substantial discount to net asset value. Are share repurchases something you would consider in the current environment?

[Jacob Meldgaard:]

No, we are not contemplating share repurchase at the world is right now that has not been part of our discussions internally.

[Operator:]

There are no further questions at this time. I'd like to hand back to Anders Redigh-Karlsen for closing comments.

[Anders Karlsen:]

Thank you. We have one more question on the webcast from Danske Bank, Håvard Sjursen, it’s for you Kim, can you comment on the sales price of the two vessels you have sold and the net cash effect.

[Kim Balle:]

The two transactions we've made is part of our ordinary replenishment focus. So it's older vessels and one handy, one of them handy size that we have divested. We do not usually comment on the precise price that we have sold them forward but our reference point is of course, the reason the values motivated of the business and we are very satisfied. Regarding proceeds, net proceeds, net liquidity additions, I can disclose that it's in the level of $13 .5 million.

[Anders Karlsen:]

There are no further questions. So this concludes the earnings conference call for the fourth quarter 2021 results. TORM’s annual report will be released on 23rd of March 2022. Thank you for participating.

[Operator:]

Ladies and gentlemen, the conference is now concluded. And you may disconnect the telephone. Thank you for joining and have a pleasant day.