Torm PLC (TRMD) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to today's TORM's Annual Report 2018 Webcast.

(Operator Instructions) 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 the presenter today, Mr. Christian Søgaard.

Thank you, please go ahead.

Thank you, and thank you to all for dialing in, and welcome to TORM's Conference Call for Full Year 2018 Results.

As mentioned, my name is Christian Søgaard, and I'm the CFO of TORM.

As usual, we will refer to the slide 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 this slide.

Slide 3, please.

I will now hand over to my copresenter, Executive Director, Jacob Meldgaard, as we turn to the presentation for the full year 2018 results on Slide 4, please.

Thank you, Christian, and thank you all for dialing in.

In 2018, TORM's results were impacted by challenging product tanker market.

I am, however, pleased that TORM's commercial and operational performance during the year continuously has been among the best within our peer group, and that we've been able to secure fee growth and renewal at attractive terms through 3 newbuilding contracts and more than 20 committed to our installations, while at the same time maintaining a strong capital structure and a low breakeven rate.

In 2018, we realized a positive EBITDA of USD 121 million and a loss before tax of USD 33 million, equivalent to USD 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% at year-end 2017.

The available liquidity was USD 406 million.

In a challenging product tanker market, TORM realized an average TCE rate of USD 12,982 per day in 2018.

However, towards the end of the year and going into 2019, the market has shown a significant recovery, and as of 5th March this year, we have covered 85% of our first quarter earning days at an average TCE rate of USD 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've continued our fleet renewal activities and took delivery of 4 LR2 newbuildings and placed an order for an additional 3 MR newbuildings, bringing the remaining newbuilding program up to 9 vessels.

During the year, we also sold 4 older units.

We will continue from time to time to sell the older vessels in the fleet, and have during the first quarter of 2019, sold an additional MR vessel.

Supporting our fleet-renewal activities, we have during the 2018 secured debt financing and loan extension for more than USD 200 million.

We will continue to leverage TORM's strong relationships with debt financing providers, and we will focus on securing new funding on pricing comparable to our remaining secured financing in order to maintain our low breakeven rate and our competitive cost structure.

We have further, during the year, completed an equity raise of USD 100 million.

To prepare for the new restrictions on sulfur emissions, the IMO 2020 regulation, TORM has committed to install scrubbers on 21 vessels and will potentially conduct installations of up to roughly half of our fleet.

Supporting our preparations, we have done 2 pilot scrubber installations, 1 on a newbuilding and 1 retrofit installation.

These installations will provide us with valuable operational experience in advance of the 2020 deadline.

I will now turn to our further preparations toward the 2020 deadline.

Turn to Slide 5, please.

In 2018, we established a joint venture with ME Production, a leading Danish scrubber manufacturer, and Guangzhou Shipyard International GSI, which is part of the China State Shipbuilding Corporation group.

The joint venture, ME Production in China, will manufacture and install scrubbers in China and deliver them to a range of maritime industry customers for both newbuilding-s and retrofitted vessels.

TORM holds an ownership stake of 27.5% in the new joint venture.

We believe that this is a unique joint venture at a time when demand for scrubbers is expected to increase significantly.

This strategic move provides us with substantial economic interest in a venture that has the potential to be a large-scale international scrubber manufacturer.

Production has commenced at 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 the 21 confirmed scrubber orders is on average estimated below $2 million per scrubber, including installation costs.

TORM expects to be able to obtain financing for a significant portion of this investment.

Turn to Slide 6, please.

Now I'll turn to the product tanker market.

In 2018, our product tanker fleet realized average TCE earnings of USD 12,982 per day.

In the LR segment, TORM achieved LR2 rates of USD 15,425 per day and LR1 rates of USD 12,982 per day.

For TORM's largest segment, MR, TORM achieved rates of EUR 12,847 per day, and for TORM's Handysize segment, year earning was just below USD 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 show particularly 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 continuous [structural] in some of the key importing regions.

In addition, an increasing number of newbuilt 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 rate declined further, and some of the benchmarks we see historically low levels as higher oil prices and weaker currencies in several emerging market economies rated 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 a structure favors shorter holds throughout the first 3 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 have been close 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 loss.

Product prices also turned from backwardation into contango, incentivizing trades of products.

In addition, a strong crude tanker market led to lower market cannibalization and encouraged a significant number of LR2s to shift from the clean market into the dirty market, effectively reducing TORM's supply.

The strong market is illustrated by TORM's recent fixings, where TORM as of 5th March, 2019, has covered 85% of its quarter earning days at an average TCE rate of USD 18,522 per day.

Slide 7, please.

During the first half of 2018, global theme petroleum product inventory drawdowns continued with the volume of stock draws being equivalent to a loss of potential trade of 4% over the period.

After falling below 5-year average levels in the second quarter, global product stocks started to build again in the third quarter as oil product demand slowed.

At the same time, 2018 saw 1 million barrels per day of net new refinery capacity coming online globally.

Several of these new products will configure 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 inventory remained tight globally throughout the first 3 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 inventories have now returned to 5-year averages, with diesel stock below average levels in main importing regions being a positive driver, and higher gasoline stocks in main importing regions, being a negative driver for future demands.

Turn to Slide 8, please.

The structural dislocation between demand and export center 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 the region is expected to be significant higher than the previous 3 years and more comparable to the level in 2015, as facilities such as the new Saudi Aramco refinery Jazan, and KPMC's (sic) [KPMG] new refinery Al Zour will come online.

TORM expects this to reinforce the role of the Middle East as a key clean 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 the IMO 2020 regulation and the accompanying shift in fuels for marine transportation towards cleaner fuels, including clean petroleum products, an increase in demand for product carriers is expected.

For the shipping industry to comply with this new regulations, it will be necessary to build and maintain stocks of compliant low sulfur fuels in bunker ports around the world, which may create new and considerable trades for product tankers.

In preparation for the 1st 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 gain from IMO 2020, due to increased refinery runs and their 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 subject to the refinery sector shipping their production to low sulfur fuel as faster than currently anticipated.

As mentioned earlier, TORM is strategically preparing for the new regulation through our newly established joint venture, installation of scrubbers on the large number of vessels and our already conducted pilot installations on 2 vessels.

I'm convinced that the demand effects of the IMO 2020 sulfur regulations, combined with our strategic steps ahead of the implementation date on 1st of January 2020, will prove beneficial for TORM over the coming years.

Turn 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 has started to fall.

In 2018, the product tanker fleet grew by 2.4%, which compares to 4.5% for the full year 2017 and 6.5% for 2016.

The product tanker order book-to-fleet ratio currently stands at 9%, which is low in our historic context.

TORM estimates that the product tanker fleet will grow by an average of approximate 3.3% per annum in the period 2019 to 2021, down from an average of approximately 5.8% during the period 2015 to 2017.

Slowing growth rate is a key point to the fundamental positive development we expect for the product tanker industry.

Slide 11, please.

In TORM's largest segment MR, we have continued to obtain very competitive freight rates throughout 2018.

I'm pleased that our results are at the top of our peer group again this quarter.

In fact, if we look back over the past 4 years, we have outperformed the peer group in average 15 -- the peer group average 15 out of 16 times, which translates into additional earnings of almost USD 100 million over the period and USD 18 million in 2018 alone.

In general, I'm very satisfied that TORM's operational platform delivers very competitive TCE earnings, and TORM 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 earnings is driven by our continued focus on positioning our vessels in the basins with the highest earnings potential.

We have a balanced strategy where we generally do not position all our vessels in one basin, but instead have some overweight in either East or West depending on our expectations to the future markets.

In a 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 have depicted our share of MR vessels positioned west of the Suez Canal, together with a 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 and 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.

Thank you, and let's turn to Slide 13, please.

With our stock-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 as a result of growth in our fleet.

As of 31st of December, 2018, every $1,000 increase in the average daily TCE rate translates into an increase in EBITDA of around $25 million for 2019.

Here, beginning of March, we have covered 24% of the year at $18,500, which is about $4,000 to $4,500 above our (inaudible) level, which means that the sensitivity now for the remaining year is about $21 million for each $1,000 change in TCE earnings.

The figure increases to $29 million in 2020 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 flows.

Slide 14, please.

Before reviewing our OpEx and admin expenses, I briefly want to touch upon our operating model.

We believe that TORM derives significant competitive advantages from operating a fully-integrated commercial and technical platform, including all support functions, such as internal sale and purchase teams.

Importantly, it also provides us a transparent cost structure for our shareholders and eliminates the possibility of related party transactions.

Naturally, we are focused on maintaining efficient operations and providing a high quality of service to our customers.

Despite this trade off, we have seen a gradual decrease of 17% in our OpEx figures over the last 5 years.

OpEx figures are below $6,400 per day for 2018, which we find is a competitive level in light of our fleet composition.

We also remain disciplined with respect to the 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 preparation for our Copenhagen and New York dual listings, and we have also invested in areas such as digitalization and business intelligence.

Slide 15, please.

Returning to our CapEx commitments.

As of 31st of December, 2018, we had available liquidity of USD 406 million.

Cash totaled $127 million, and we had undrawn credit facilities of USD 279 million.

By the end of the year, our total CapEx commitments were $281 million, of which, we expect to pay $255 million this year and $26 million in 2020.

The large majority of our commitments relates to our remaining 7 high specification newbuilding vessels that all includes scrubber installations, but we have also committed $23 million in 2019 for retrofit scrubber installations for vessels underwater.

With cash and undrawn rights above USD 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 of TORM's fleets was USD 1.675 billion end of year.

We have a gross outstanding debt amounting to USD 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 3 percentage points compared to last year, and we consider this to be a conservative level given where we are in the cycle.

Net asset value is estimated at $856 million based on global valuations.

This corresponds to $11.6 per share or DKK 75.5 per share.

So just before commencing this call, we were trading at DKK 43 per share or $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 Instructions) And your first question comes from the line of Jon Chappell.

Jacob and Christian, I wanted to touch on these last couple of slides that Christian went through and also lay them next to some of Jacob's comments on the market.

So having this type of liquidity is a luxury.

And when you see the type of outlook you've laid out for the product tanker market, it seems that it'll build as opposed to degradate.

And 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 2 years?

If you do enter an upturn in the market, is it growth?

Is it return of capital to shareholders?

How do you kind of balance keeping a strong balance sheet with some of this disconnect in the equity markets relative to the outlook of the shipping markets?

Jacob here.

Thanks, Jon.

So yes, clearly, if we are right in our beliefs around the future market, then 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 sticking to, which is that we will be distributing back either by dividend or share buybacks 25% to 50% of our net earning on a semiannual basis.

So let's just for illustration say that the current market persisted, we would then be looking at, in early autumn, so in August, to be distributing back 25% to 50% of the results of the first half.

And clearly, in the current environment, you can ask yourself how much should that be paid back in cash and how much should be done in terms of share buyback program for the company.

And then that would leave a significant amount, obviously, still to have fleet renewal, and there, of course, we need to think about this project as a going concern where we are depleting year by year, you can say, as a rule of thumb.

If you look at it, my thinking around this is that we are being depleting -- depreciating about $120 million of value on a yearly basis.

So you would be thinking along the lines of that if you find the right type of investments and that would be sort of your yearly reinvestment program just to stand still.

That's interesting.

And that answered the second part of my question as it seems that if you do the return to the 25% to 50% payout, there is positive cash.

The remaining 50% to 75% then would be focused on fleet renewal as opposed to accelerating your debt repayment.

You're pretty happy with amortization schedule as it stands today?

Yes.

That's correct, yes.

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 talked about the impact on the market -- expected impact on the market in the second half of this year as the global bunkering market prepares for IMO 2020, do you have a -- kind of, a strong lean as to where you think it'll almost benefit the product tanker markets?

Is it an Atlantic basin event?

Is it a broadly global event with a balanced fleet?

How do you think about positioning for what could be a real disruptive factor in the market?

That is a very good question, Jon.

And we actually do have an opinion around it, but it is something where, I would say, if there is any secret sauce element that I'm not comfortable sharing here, that would be our forward-looking.

I think we have been very transparent in giving you here insight as to our analysis on how we optimize our earning based on geographical optimization.

Going forward, yes, we have opinions around it, but it is something that we are refining.

It's something that is moving and that we will not be with forward-looking statement making any statements around.

Having said that, we look forward to sharing with you how it will be looking in the quarters to come.

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 '18, when do you feel you'd need to exercise those to have them back in the trading fleet by the turn of the year?

Yes.

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 inning on that.

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.

Just one question.

As the deliveries of crude has -- on the Virgin Voyage has affected negatively on product tankers throughout '18, how does that look in '19, delivery schedule for crude?

Dan, Jacob here.

Thanks for that.

Yes, so I think there are 2 things to bear in mind: the delivery in the crude tanker market is relatively front-loaded, so it's here in the first; and the second order 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, crude 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.

But I think that in combination, that gives some comfort too, that by second half of this year, the number of deliveries are 50% 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 that leads them to have a less tendency to cannibalize and clean.

And no further questions at this time.

Please continue.

So we have a couple of questions from the web that we're just asking the operator to put through.

So we have, as Christian said, a couple of questions here, and there is one positive trend for more disposal sales scrapping up all the vessels.

So here, generally, in the product tanker space, the scrapping age is around 25 years of age.

We have no vessels that are of that vintage in our fleet.

So there will be no plans for any scrapping of vessels.

Disposals of vessels, as alluded, we -- last year, we sold 4 older vessels in the second half of the year.

And so far, we've sold 1 in -- here in 2019.

Average age of those vessels are around 18 years.

And we will, as 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 none scrubber-fitted MRs to TORM and how much will come from the scrubber investments in 2020?

So here, what we think about it is that based on our assumptions on the spread between compliant fuels and high-sulfur fuel oil and also on the relative uses that we can have of a scrubber that, in essence, on an MR, the payback time is around 2 to 2.5 years on a scrubber-fitted MR. So that's the way we look upon that investment.

And no further questions from the web at this time.

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 11 April 2019, and release our Q1 results on 14 May 2019.

So thank you for dialing in.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

Thank you for participating, you may all disconnect.