TORM plc
Q4 2018 Earnings Call Transcript

Published: 12 Mar 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to today's TORM's Annual Report 2018 webcast. At this time, all participants are in a listen-only mode. During the presentation, we will have a question-and-answer session. [Operator Instructions] Alternatively, you can submit questions at any time via the webcast. To submit a question, click the Q&A icon in the lower left hand corner of your screen, add your question in the open area and click then to submit. I must advise you that this webcast is being recorded today, Tuesday, the 12th of March, 2019. And I would now like to hand the webcast over to Mr. Christian Søgaard. Thank you. Please go ahead.

[Christian Søgaard-Christensen:]

Thank you, and thank you to all dialing in, and welcome to TORM's conference call for our full-year of 2018 results. As mentioned my name Christian Søgaard and I'm the CFO of TORM's. As usual, we will refer to the slides as we speak, and at the end of the presentation, we will open up for questions. Turn to Slide 2 please. Before commencing, I would like to draw your attention to our usual Safe-Harbor Statement presented on the slide. Slide 3, please. I will now hand over to my corporate center who is Executive Director, Jacob Meldgaard as we turn to the presentation for the full-year 2018 results on Slide 4, please.

[Jacob Meldgaard:]

Thank you, Christian, and thank you all for dialing in. In 2018 TORM's results were impacted by a challenging progress in the market. I’m however please that from commercial and operational performance during the year continuously has came among the best within all peer group and that we have been able to secure people and renewed effective terms through three new building contracts and more than 20 committed to our installations, while at the same time maintaining a strong capital structure and low [premium] (Ph) rate. In 2018, we realized a positive EBITDA of US$121 million and a loss before tax of US$3 million equivalent to US$0.48 per share. TORM's return on invested capital for the year was slightly positive at 0.1%. Illustrating our continued focus on maintaining a solid balance sheet, the net loan to value was 53% at year-end versus 56% percent at year-end 2017. The available liquidity was US$406 million. In a challenging Park Mega Market, TORM realized an average TCE rate of US$12,982 per day in 2018. However, towards the end of the year and going into 2019, the market had shown a significant recovery and as of 5th March this year, we had covered 85% of our first quarter of 30 days at an average TCE rate US $18,522 per day. We believe that there are positive dynamics present in the market to support a sustained recovery, and I will discuss the market in further details on the following slides. During 2018, we have continued our fleet renewal activities and took delivery of four at our two newbuildings, and taken order for additional three MR newbuildings bringing the remaining new building program up to nine vessels. During the year, we also sold four older units. We will continue from time-to-time to sell older vessels in the fleet, and at during the first quarter of 2019, we sold an additional MR vessel. Supporting our fleet renewal activities, we had during 2018 secured a debt financing and loan extension for more than US$200 million. We will continue to leverage TORM's strong relationship with debt financing provider, and we will focus on securing new funding on pricing comparable to our remaining secured financing in order to maintain our low break even rate and our competitive cost structure. We have further during the year completed an equity rates of a US$100 dollars. To prepare for the new restrictions on sulfur emissions the IMO 2020 regulations, TORM is committed to install scrubbers on 21 vessels and will potentially conducting installations up to roughly half of our fleet. Supporting our preparations, we have done two pilot scrubber installations. One on a newbuilding and one retrofit installation. These installation will provide us with valuable operational experience in advance of the 2020 deadline. I will now turn to our further preparations towards 2020 deadline. Turn to Slide 5 please. In 2018, we established a joint venture with ME Production, a leading scrubber Danish manufacturer and Guangzhou Shipyard International GSI, which is part of the China State Shipbuilding Corporation Group. The joint venture, ME Production China, will manufacture and install scrubbers in China, and deliver them to a range of maritime industry customers for both newbuildings and retrofitted vessels. TORM holds an ownership stake of 27.5% in the new joint venture. We believe that this is unique joint venture, at a time when demand for scrubbers is expected to increase significantly. This strategic move provides us with a substantial economic interest in a venture that has the potential to be a large-scale international scrubber manufacturer. Production has commenced, as the joint ventures production facilities and the first scrubber has been produced, that scrubber was delivered to TORM. The JV will also result in TORM securing scrubber capacity and obtaining attractive prices for the scrubber investments that already have a relatively short payback time. The CapEx related to 21 scrubber orders is an average estimated below $2 million per scrubber including the installation cost. TORM expects to be able to obtain financing for significant portion of this investment. Turn to Slide 6, please. Now we will turn to the products tanker market. In 2018, our product tanker field realized average TCE earnings of US$12,982 per day, in the LR segment TORM achieved TORM achieved LR2 rates of $15,425 per day and LR1 rate of US$12,982 per day. Our TORM’s largest segment MR formative rate of $12,847 per day and for TORM's handy size segment the earnings was just below $10,000 per day. During the first half of the year, product tanker freight rates remained at a level similar to the rates seen in the same period in 2017. 2018 started out with healthy trading volumes and exports from the U.S. Gulf shore particularly a strong growth, supported by increasing demand from Mexico and South America. Nevertheless, the positive impact of higher trading volumes was offset by shorter trading distances, partly as a result of the continued stock draw in some of the key importing regions. In addition, an increasing number of newbuild crude tankers opted for a clean cargo on their maiden voyage, reducing demand for product tankers in the East. Crude cannibalization intensified in the second quarter, driven by a depressed crude tanker market. In the third quarter, product tanker freight rates declined further, and some of the benchmarks reached historically low levels, at higher oil prices and weaker currencies in several emerging market economies weighed negatively on oil demand and reduced trading volumes. Crude cannibalization continued at a high level in the third quarter. On top of the pressure from crude tankers, a backwardated oil price structure favored shorter hauls throughout the first three quarters of 2018. From the middle of the fourth quarter, product tanker freight rates started to pick-up and reach levels not seen since the end of 2015 and beginning of 2016. Key interregional product arbitrage spreads, which had been closed for most of the year, widened and lifted demand for product tankers. Both the price spreads for gasoline and naphtha between West and East as well as spreads for diesel and jet fuel between East and West became supportive for product flows. Product prices also turned from backwardation into contango, incentivizing trades of products. In addition, a stronger crude tanker market led to lower market cannibalization and incurred a significant number of LR2s to shift from the clean market into the dirty market, effectively reducing tar supply. The strong market is illustrated by TORM's recent [indiscernible] where TORM's as of 6th, March, 2019 has covered 85% of its core earning days at an average TCE rate of US$18,522 per day. Slide 7 please. During the first half of 2018 global team petroleum products inventory drawdowns continued with the volume of stock gross being equivalent to a loss of contingence rate of 4% over the period. After falling below five year average levels in the second quarter, global products started to build again in the third quarter as oil product demand slowed. At the same time, 2018 saw one million barrels per day of net new refinery capacity coming online globally. Several of these new projects were configured to maximize gasoline output, which together with the lightening of the global crude supply led to an increase in global gasoline output and subsequently a build-up in stockpiles. Diesel inventories remained tight globally throughout the first three quarters of the year, but normalized in some key exporting areas in the second half of the year, opening-up several arbitrage spreads that had been closed throughout most of the year. On a global scale, clean petroleum product inventory had now returned to five year averages with these results below average levels in maintain - and weaken has been a positive drive and high gasoline starts in main important the regions being a negative driver for future demands. Turn to Slide 8 please. The structural dislocation between demand and exports centers is expected to continue and more refined products will be produced and exported from the Middle-East to the rest of the world. Over the coming years the expansion in many region is expected to be significant higher than in previous three years and more comparable to the level in 2015, at facilities such as the new [Palio Rancho] (Ph) refinery in Japan and KTMCs new refinery [Indiscernible] will come online. So much to tested to reinforce the role of the Middle-East as a key team for our product exporter contributing positively to product tanker ton mile demand in the coming years. Slide 9 please. As the overall shipping industry is preparing for IMO 2020 regulation and the accompanying shift in fuel still remain transportation towards [indiscernible] including clean petroleum products and increase in demand for products care is expected. For the shipping industry to comply with this new regulation, it will be necessary to build and maintain stocks of compliance low sulfur fuels in [indiscernible] port around the world, which may create new and considerable trade for product tankers. In preparation for the 3rd of January, 2020 deadline, it is expected that the impact will emerge already from the second half of 2019. Also crude tankers are expected to paying from IMO 2020 due to increased refinery runs and the need to store excess high sulfur fuel. TORM currently expects the IMO 2020 sulfur regulation to lead to an incremental increase of around 5% in product tanker trade in 2020. The increase is topic to the refinery sector shifting their production to low sulfur fuels faster than currently anticipated. As mentioned earlier, TORM's is continually preparing for the new regulation through our newly effective joint venture, installation of scrubbers on the large number of vessels and have already conducted pilot installations on two vessels. I'm convinced that the demand effects of the IMO2020 sulfur regulation combined with our strategic steps ahead of the implementation date on 1st of January, 2020 will prove beneficial for TORM over the coming years. Turning to Slide 10 please. The product tanker order book to fleet ratio is at a comparatively low level, and we can see deliveries of new tonnage have started to fall. In 2018, the product tanker fleet grow by 2.4%, which compares to 4.5% for the full-year of 2017 and 6.5% for 2016. The product tanker order book to fleet ratio currently stands at 9%, which is low in a historic context. TORM estimates that the product tanker fleet will grow by an average of approximately 3.3% per annum in the period 2019 through 2021, down from an average of approximately 5.8% during the period 2015 through 2017. Slowing growth rate is a key point to the fundamental process development we expect for the product tanker industry. Slide 11, please. In TORM's larger segment MR, we have continued to obtain very competitive fleet rate throughout 2018, I'm pleased that our results are at the top of our peer group again this quarter. In fact, if you look back over the past four years, we have outperformed the peer group average 15 out of the 16 times, which translates into a seasonal earnings of almost a US$100 million over the period and US$18 million in 2018 alone. General, I’m very clarified that TORM’s operational platform delivers very competitive TCE earnings and TORM's is well positioned to take advantage of the promising supply demand fundamentals in the market. Slide 12 please. We believe that a key decisive factor for delivering above average TCE unit is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. We have a parent strategy where we generally do not position all our vessels in one basin, but instead had some overweight in either East of West depending on our expectations to the future market. Payments scenario where the market is strengthening in the West relatively compared to the East, we want to increase our exposure to the West. To illustrate our strategy and choices, we depicted our share of MR vessels positioned West of Suez Canal to the together with the measure of the premium the West market has realized over the East market. We have seen historically that this strategy has assisted us in generating higher TCE earnings than the peer group average. I believe this will continue in the future. I will now hand over to Christian, for a further review of TORM's cost structure and financial position.

[Christian Søgaard-Christensen:]

Thank you, and let's turn to Slide 13, please. With our sock based profile, we have a significant leverage towards increases in underlying product tanker rates. This is particularly true in 2019 and 2020, when our unfixed days increased a result of the growth in our fleet. As of 31st of December, 2018, every US$1,000 increase in the average daily TCE rate, translate into an increasing EBITDA of around US$25 million for 2019. Here beginning of the March, we have covered 24% of the year at 18,500 which is about US$ 4,000 to US$4,500 above [PBG] (Ph) breakeven level, which means that the sensitivity now for the remaining year is about US$21 million for each US$1,000 change in TCE earnings. The CAGR increases to 29 million and from 20 million and 30 million in 2021. TORM has a positive long-term view on the market and we believe that we are well positioned to generate significant cash flow. Slide 14, please. Before reviewing our OpEx and admin expenses, I briefly wanted to touch upon our operating model. We believe that TORM provides significant competitive advantages from operating a fully integrated commercial and technical platform, including all support functions such as an internal statement purchase team. Importantly, it provides a transparent cost structure for our shareholders, and eliminate the possibility of related party transactions. Naturally, we are focused on maintaining efficient operations, and providing a high quality of services for our customers. Despite this trade-off, we have seen a gradual decrease of 17% in our OpEx figures over the last five years. OpEx figures are below 6,400 barrels per day for 2018, which we find is a competitive level in light of our fleet compositions. We also remain disciplined with respect to general and administrative expenses, although these can be expected to fluctuate a bit going forward based on the size of our fleet. In 2018, we have expanded our current office premises in Mumbai, conducted the required Sarbanes-Oxley compliance progression for our [indiscernible] and New York dual listings and we have also invested in areas such as digitalization and business intelligence. Slide 15 please. Turning to our CapEx commitments as of 31st of December, 2018 we had available liquidity of US$406 million cash total US$127 million and we have undrawn credit facilities of US$279 million. By the end of the year, our total CapEx commitments were $281 million of which we expect to pay $265 million this year and $26 million in 2020. The last majority of our commitments relates to our remaining seven high specification newbuilding vessels at all includes further installations, but we have also committed US$23 million in 2019 plus retrofit scrubber installations for vessels under water. With cash and undrawn rights about US$$400 million, the CapEx commitments are fully funded and very manageable. Slide 16 please. Finally, I want to sum up our financial position in terms of key metrics such as net asset value and loan-to-value. Vessel values have increased during the fourth quarter of 2018 and the values [indiscernible] was US$1.675 billion end of the year. We had a gross outstanding debt amounting to US$755 million and none of our debt facilities matures in 2019 or 2020. Finally, we have outstanding committed newbuilding CapEx of $258 million, and cash of $127 million. This gives us a net loan-to-value of 53%, which is down three percentage points compared to last year and we consider this could be a conservative level given where we are in the cycle. Net asset value is estimated at $856 million based on both evaluations. This corresponds to $11.6 per share or DKK75.5 per share. So just before commencing this call, we were trading at DKK43 per share or US$6.5 per share. So we are trading at a considerable discount to net asset value. So finally, I want to say that we have a balance sheet that provides us with the strategic and financial flexibility that we would like to have. So with this, I will turn to Slide 17, and let the operator open up for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Jon Chappell, Evercore ISI. Your line is now open.

[Jonathan Chappell:]

Thank you operator, good afternoon. Jacob and Christian I wanted to touch on this last couple of slides that Christian went through and also 11, next some of Jacob’s comments on the market. So having this cycle of liquidity is a luxury and when you see the type of outlook you have laid out for the product tanker market, it seems that it will build as oppose to [indiscernible] and so if you take the last slide with the massive discount to your NAV, how are you thinking about the most efficient use of capital and liquidity over the next years. If you do enter an upturn in the market, is it growth, is it return to capital shareholders, how do you kind of balance keeping a strong balance sheet with some of this disconnect in the equity market relative to the outlook in the shipping markets?

[Jacob Meldgaard:]

Jacob here, thanks Jon. So, clearly, yes, we are right in our belief around the future, we need to think about the distribution and we have a policy that we have agreed with our Board a number of years ago that we are taking to which is that we will be distributing back either by David and or share buybacks 25% to 50% of our net earnings on our semi-annual basis. So let's just registration take - that the current market persisted we would then be looking at in early in August to be a distributing back 25% to 50% of the results of the first half. And clearly in the current environment, you can ask yourself how much would then be paid back in cash and how much would be drawn in terms of share buyback for the Company. And then that would leave a significant amount obviously still to have fees renewal and there of course we need to think about this brochure as a growing concern where we are depleting year-by-year to compare the rule of thumb if you look at it, my thinking around this is that we are depreciating about a US$120 million of value on yearly basis. So you would be thinking along the lines of it you could find the right type of investments that would be sort of yearly reinvestments programs just to stand still.

[Jonathan Chappell:]

That is interesting and that answered the second part of my question. As it seems that if you do return to the 25% to 50% of payout, there is positive cash, the remaining 50% to 75% then would be focused on fleet renewal as oppose to accelerating here debt repayment, to and you are pretty happy with the amortization schedule where it stands today?

[Jacob Meldgaard:]

Yes.

[Christian Søgaard-Christensen:]

That is correct, yes.

[Jonathan Chappell:]

Second question is on Slide 12, it's a really interesting chart on the positioning of the fleet. And without giving away too many commercial secrets, as you talk about the impact on the market - expected impact in the market in second half of this year as the global [bunker] (NYSE

[Christian Søgaard-Christensen:]

That is a very good question, John, and we actually do have an opinion around it but it is something where, I would say, if there is any secret sauce elements that are not comfortable sharing here that would be our forward looking. I think we have been very concerned in giving you here insight as well analysis on how we optimize our earnings on geographical optimization. Going forward, yes, we have the opinions around it, but it is something that we are refining, it’s something that is moving and then we will not be - forward looking statements making any statements around. Having said that, we look forward to sharing with you, how it will be looking in the quarters to come.

[Jonathan Chappell:]

Yes. Perfectly understandable. Then if I may just add one more quick one. Just to be clear, the scrubbers that you already agreed upon. I assume, especially given your joint venture, they will all be installed in the ships back in the trading market by January 1, 2020. The options on the 2018. When do you feel you will need to exercise those to have them back in the trading fleet by the turn of the year?

[Christian Søgaard-Christensen:]

So given that we have intimate of course understanding of the production of the scrubber inside of the joint venture. I think we can say that we are closing up to the final rating on that.

[Jonathan Chappell:]

Okay, that is fair. Thanks very much here, that is very much question.

[Christian Søgaard-Christensen:]

Thanks.

[Operator:]

Thank you. No further questions over the phone line. [Operator Instructions] We have one question over the phone line now. And next question comes from the line of Dan Togo, Handelsbanken. Your line is now open.

[Dan Togo Jensen:]

Thank you and good afternoon. Just one question, as the [indiscernible] I think negatively on approaching this throughout 2018. How does that look in 2019 delivery schedule for group? Thanks.

[Jacob Meldgaard:]

Dan Jacob here, thanks for that. Yes. So I think there are two things to bear in mind. The delivery [indiscernible] is relatively front load. So it's here in the first and second quarter that you have the predominant part of the order book. So we are sort of eating ourselves through that portion and at the same time food tanker rates have come up considerably from the low points of where what that was real cannibalization taking place in the second and the third quarter of last year. So I think that in combination, that gives some comfort to that by second half of this year, the number of deliveries are 60% lower than in the first half of this year and at the same time the freight rate environment generally has improved. So that leads to - that is in general more favorable conditions at least to have a less tendency to cannibalize something.

[Dan Togo Jensen:]

Okay. Very helpful. Thank you.

[Jacob Meldgaard:]

Thank you.

[Operator:]

Thank you. And there are no further questions at this time, please continue.

[Jacob Meldgaard:]

So we had a couple of question from the web that was just asking [Indiscernible].

[Christian Søgaard-Christensen:]

So we have - as we can [indiscernible] here and there is one plans for more disposal ramping up over the vessels, so here generally in the product tanker space the driving age is around 25 years of age, we have no vessels that are of that vintage, a piece of that would be no plans in scrapping of vessels, disposals of vessels. As alluded last year we sold a four older vessels in the second half of the year and so far we have sold one here in 2019 and we have taken those efforts our around 18 years and we will at an ongoing thing be looking at how we can manage our fleet, so by virtue of selling off older units and taking on younger units. The second question is what free cash flow will come from [Indiscernible] and how much will come from the - investments in 2020. So here what we think about it is that based on our assumptions on the spreads between compliance fuels and highs sulfur fuels oil and also on the relative uses that we can have of our scrubber that in essence on an MR the payback time is around two to 2.5 years on a scrubber fitted MR. So that is the way we look it from that investment. And no further breakings from the [Indiscernible].

[Jacob Meldgaard:]

Good. With this, we are concluding the earnings conference call for the full-year results for 2018. We will host our Annual General Meeting on 11th of April, 2019 and release our Q1 results on 14 of May, 2019. So thank you for dialing in.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.