Torm PLC (TRMD) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining TORM plc Fourth Quarter and Full Year 2020 Results Call. (Operator Instructions) It's my pleasure, and I would now like to turn the conference over to Mr. Andreas Abildgaard-Hein, Head of IR. Please go ahead, sir.

Thank you. Welcome to TORM's conference call. We have been looking forward to presenting to you the results for the fourth quarter and full year. We will refer to the slides that we present during our presentation. And at the end of the presentation, you will get the possibility to ask questions. After this conference call, you will be able to listen to a recording of the call. And as usual, you can find our presentation 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. The results will, as usual, be presented by Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle.

Please turn to Slide 4. I will now hand over to Jacob.

Thank you, Andreas, and good afternoon, good morning to all. Thank you for connecting with us today for our Q4 and full year 2022 presentation. The headline of today's call is that the very strong product tanker markets have continued here into the fourth quarter of 2022 and that the underlying factors have also continued into 2023. No visible signs as of now as to when the market returns. We have today presented the strongest results for the second quarter in a row. This means that we, for the fourth quarter of 2022 achieved an EBITDA of $267 million and a profit before tax, up $222 million. Our fourth quarter average TCE ended at $47,520 per day across the fleet and above $45,000 per day across our MR business.

For the full year 2022, with our average TCE rate of $34,154 per day, we reached a total EBITDA of $743 million and a profit before tax of $557 million. With this, we ended with a return on invested capital of 29.2% for the year.

TORM's Board of Directors has approved a dividend of $2.59 per share based on the fourth quarter, and we expect to distribute around $212 million in early April. This means that our total distributions for 2022 will end up at around $378 million. The distributions are in line with the distribution policy announced last year.

After the end of the fourth quarter of 2022, we acquired 7 LR1 tankers built between 2011 and 2013. As of today, 2 of the vessels have been delivered and the remaining vessels will be delivered before the end of April of this year.

Further, we've today entered into an agreement to purchase 3 2013 built MR tankers for a total cash commentation of $48.5 million in combination with the issuance of 1.42 million shares. We expect that these vessels will be delivered before the end of May. And with this, our fleet will reach a total of 88 [controlled] vessels.

Finally, we also announced that we have obtained a loan commitment from a number of banks to refinance and extend maturity on existing loan and leasing agreements for up to $433 million. At the same time, we obtained commitment to finance additional second-hand vessels for an amount of up to $123 million. With this refinancing that will take place during the second quarter of this year, we have obtained more attractive terms on a large part of our funding.

Here, please turn to Slide 5. Since the start of the Russian innovation of Ukraine in February 2022, we have seen strong improvements in product tanker rates, increased trade flows, longer trade distances partly due to the EU sanctions on Russia and partly due to more fundamental factors such as oil demand recovery, recent refinery closures and consequently increased import needs. This has all moved the product tanker fleet closer to the point of full utilization, which has also led to higher freight rates and where even small changes in the underlying demand and supply are creating high volatility in the freight rates as we have also experienced over the past 12 months.

Here, please turn to Slide 6. This rate volatility can be demonstrated by movements in average freight rates. But in the past 12 months, we have also seen increased rate volatility across the different regions, which has in turn led to even more MR vessels that are balancing over longer distances to optimize their release. These more efficient selling patterns have tightened the availability of vessels on the market and further support freight rates. The irregular and suboptimal trade patterns is further emphasized by the fact that owners that are willing to do Russian trades are also willing to wait for these higher paying cargoes, which is again tightening the vessel availability.

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, the right cargo combination is essential for earning optimal. We can see that we, with our we are continuing to have strong support from our customers, and we remain confident that we will have access to the cargoes and traits that is, in turn, enabling us to position our fleet towards the premium regions.

Slide 7, please. When we look more closely at the main market drivers. Clearly, the EU ban on Russian oil and oil products has been the most important demand driver in the past 12 months. We have been estimating that the EU ban on Russian oil products and the corresponding fuel trade recalibration will lead to at least 7% increase in ton mile as Europe needs to import clean oil products ,especially diesel from sources further afield. And similarly, Russia needs to find new buyers for their products further way. And indeed, this trade recalibration has started.

The EU started to prepare for the ban already ahead of the final deadline of the 5th of February this year by importing higher volumes from non-Russian sources, especially the Middle East and India. At the same time, the EU countries continue to import high volumes from Russia, basically until the very start of the ban. Higher import volumes added strongest ton miles, but also allow the EU countries to build up diesel inventories through [multi-year lows] . With inventories back to normal levels, the EU import needs are currently lower compared to the high level seen at the end of last year. But these imports are coming from further appeals and the inventories will need to be rebuilt against increasing import demand over the coming months.

Similarly, Russia has so far been quite successful in redirecting its clean products to markets in North and West Africa, Turkey, the Middle East and lately also increasingly to Asia. Considering that around 2/3 of Russian clean petroleum products originate from the Baltic Sea ports, these changes in export destinations has resulted in solid ton mile increases.

Kindly turn to Slide 8. The geopolitical tensions in Europe have no doubt been the main driver of the strong freight rate environment. However, fundamental drivers not directly related to the geopolitical situation in Europe such as changes in the refinery landscape are also significant contributors. Since 2020, around 3 million barrels per day of refining capacity has been closed down permanently or is scheduled to be closed down during this year. Most of the affected capacity is located in regions, which are already large importers of refined oil products with Australia, New Zealand, South Africa as some of the most prominent examples.

Just to give an example of the potential impact, refinery closures resulted in an almost 20% increase in clean controller imports to these 3 countries and contributed with a 2 percentage point increase in the global ton-mile demand for product tankers. Given the fact that oil demand in these countries is still lagging behind the pre-COVID levels, we believe that the full effect of refinery closures is yet to be seen.

On the other hand, these refinery closures coincide with more than 4 million barrels per day of new capacity coming online, mainly in the Middle East and China, regions that already today are large exporters of oil products. Much of this capacity, especially from the Middle East, is currently ramping up and reaching full capacity this year and is, to a large extent, concentrated around middle distillates, which we believe will facilitate the trade recalibration triggered by the EU ban on Russian oil. Both these above-mentioned developments are positive for trade flows and ton mile in the coming years, with only a few projects which are not positive for trade.

Please turn to Slide 9. The positive outlook for the demand for product tankers in the next 2 -- 3 years coincides with the supply side, which is the most supportive seen for more than 2 decades with bigger higher newbuilding prices, limited shipyard space, tanker ordering last year remains very low, especially when considering the strength of the freight market. So far this year, we've seen some increased interest in new building orders, although not all of this has materialized yet. However, as the shipyards are built up with other vessel segments and continue to have a presence to these other segments, only very few product tanker positions are available for end 2025. And in China, even the 2026 order group are also being rapidly filled up. This will effectively limit the fleet growth in the next 2 to 3 years.

And here, please turn to Slide 10. To conclude our remarks on the product tanker market, we see that the main demand and supply drivers on product tanker market continues to be very supportive. The trade recalibration changes in refinery landscape that already started last year will continue to support the market also this year with the new large refineries ramping up in the Middle East being an important brick in this bottle. We cannot disregard the fact that the current environment with high intergeneric pressure on the global economy is likely to slow down the growth base of the global oil demand.

Nevertheless, we have the opinion that the effect of the redistribution of the energy supply chain will overweigh the potential negative effects caused by slower demand growth. As we also discussed, the positive demand side is complemented by the supportive supply side situation, ensuring a low fleet growth for at least the next 2, 3 years.

I'll now hand it over to my colleague, Kim for further elaboration on our performance with coverage for the coming period, our declared dividend and, of course, also the refine financing commitment.

Thank you, Jacob. Please turn to Slide 11. We reported record high TCE rates in the third quarter of 2022, but we managed to obtain even higher rates, average rates in the fourth quarter of 2022. We increased our rates from $44,376 per day in Q3 to above $47,500 per day in the fourth quarter across the fleet. At the beginning of the year, rates have increased from an average of $16,743 per day, equaling an increase of 184% from the first to the fourth quarter. For MRs, the average rates for the fourth quarter ended at $45,029 per day for LR1s at $48,076 per day (sic) [$48,067 per day], and for LR2s the average rates were $5,889. I'm very happy with the performance of the One TORM platform that once again demonstrated outperformance.

Please turn to Slide 12. Looking into the TCE rates we have obtained during the beginning of this year, we have seen that the strong markets are continuing. TORM has covered 90% of our first quarter 2023 tanker days at an average rate of $43,002 per day. And for the MRs in the first quarter, we as of the 30th of March, fixed 89% at $37,730 per day. And so far, 86% of the LR1 tanker base were fixed at $44,135 per day and 90% of the LR2 days were fixed at $65,960.

Also, in the remaining quarters, we managed to fix rates at strong levels. As of 12th March, 18% of our days are fixed at $42,237 per day in the second quarter. 13% are fixed at $42,228 per day in the third quarter and 13% of fixed at $42,527 per day in the fourth quarter of this year. The main part of our coverage beyond the first quarter was made in the LR1s and MR vessel classes remaining -- sorry, maintaining a high operational leverage in the LR2 best class.

Please turn to Slide 13. The strong TCE rates led to the highest EBITDA from our operations on record and our fourth quarter EBITDA of $267 million brought us to a full year of $743 million, which is more than the previous 4 years combined. As per 31st December 2022, the value of the 78 vessels in our fleet reached USD 2.65 billion, which is an average of more than 37% increase compared to the end of 2021, where we even had 85 vessels. The increasing freight rates that we saw in Q2 and Q3 of 2022 naturally led to increasing net working capital.

The high, but more stable rate environment from Q3 to Q4 resulted in a likewise more stable development in our net working capital. Is the working capital development in the fourth quarter only had a limited impact on the net cash generation and thus also the dividend declared based on our Q4 2022 cash position.

During the fourth quarter of 2022, TORM's net loan-to-value decreased to the lowest level in recent years. Our net LTV decreased to 25% at the end of Q4 '22, coming from 52% at the end of 2021. It was largely driven by set increase in vessel values, ordinary debt installments and our strong cash generation. If we take the declared dividend amount for Q4 of 2022 of around USD 212 million into account, the net loan-to-value would increase -- would instead be 33%.

Lastly, I can affirm you that as per year-end, TORM had low CapEx commitments of $18 million in total, which is mostly related to scrubber investments.

Please turn to Slide 14. As mentioned, we will distribute around $212 million or $2.59 per share based on our end of Q4 cash balance, consistent with our distribution policy, our distribution is based on our cash position of $324 million and the working capital facilities of $93 million. We deduct restricted cash primarily related to financial instruments and cash in Marine Exhaust Technologies of around $6 million. And finally, our earmark proceeds of $58 million. Our minimum cash reserve for 78 vessels was $140 million at the end of the fourth quarter.

So in conclusion, it resulted in a payout ratio for Q4 of 2022 with a profit of $222 million of more than 95%. The total dividend distributed in relation to 2022 will thus be $378 million. We expect that the potential dividend payment in the next quarter will not be notably impacted by the acquisition of the 7 LR1 vessels that we completed in January this year. The on finance part of the acquisition will thus be taken from our earmarked proceeds. All other things being equal, this will leave our earmarked proceeds of around $11.8 million at the end of Q1 2023.

Please turn to Slide 15. This morning, we announced that we have acquired 3 additional MR vessels. The vessels have fuel-efficient eco vessel specifications and I expect it to deliver no later than May 31, 2023. We will pay for the transaction with 50% cash and 50% shares that will be issued in conjunction with the delivery of the vessels. The cash element of the transaction is expected to be financed through traditional bank financing. Also today, we obtained commitment for the refinancing of $433 million bank and leasing agreements with 2 new bank facilities, thereby extending debt maturities until mid-2028 and with the possibility to extend most of the debt expiration to mid-2029.

Further, we have obtained commitment for financing of additional secondhand vessels for up to $123 million with the same exploration terms. Refinancing -- or the refinance debt will be structured as a syndicated facilities agreement into 6 to 9 banks of up to $322 million, that will refinance 21 vessels built between 2019 and 2020 and a bilateral facilities agreement above to $111 million that will refinance 26 vessels built in 2003 and 2008.

Looking at our repayment profile, we will increase repayments in 2023 and 2024 slightly, thereby deleveraging more than under the existing loan agreements in the first years. In addition to extending maturity, we have obtained attractive terms on this new financing agreement. The closing of the agreement is subject to documentation and is expected during the second quarter of this year.

We are very pleased with the support from our existing banks and our new banks. With them, we are confident that we will have set the group of banks that for the years to come, can assist us in growing TORM's business. During all of 2022, TORM was in compliance with all financial covenants.

With that, we will let the operator open up for questions.

(Operator Instructions) We have the first question from Jon Chappell from Evercore.

Jacob, 2 somewhat obvious strategic questions for you this afternoon. I like the Slide 12 that you put in on the 23 coverage, and it feels like it's pretty balanced on the LR1s, but clearly, with your optimism on the market, keeping a lot of spot exposure on the core LR2 and MR fleet makes sense. At a certain point when you start to lock in some of the longer term, maybe 1 to 3-year contracts that are out there? And maybe as part of that question, can you speak to the liquidity of that market and how representative it is of the current spot rate environment?

Yes. Thanks for that, Christian -- Jon, Jacob here. We've had the same, I think, conversation over the last couple of quarters, what would be sort of the time when you start to take cover a bit deeper. Clearly, we would be more inclined to look at it today than in the last quarter. Rates on, let's say, on an LR2, just an example, have gone from 3 years being sort of in the mid high 30s to probably around 40 now. So given that you -- in the meantime, as you can see, have had the benefit of a strong spot market is of course encouraging that the long end of the market is creeping up, at the same time, as more time has passed on your asset at rates that are above that. But I don't have a precise idea about what it is that we would look at. But of course, it's a better return today than having done it 3 months ago.

Okay. Okay. The other one is, I'm sure you're getting great returns on the secondhand vessels. You're buying the 7 LR1s in the 3 MRs that you just announced today. But a little curious the market seems incredibly strong from an asset value perspective, especially for ships of that age. You're still out there buying a ton of liquidity to do so. Why haven't we seen kind of a greater unwinding of some of the older tonnage in the fleet? So kind of a one-for-one substituting a 10-year-old for maybe a 15-year-old and taking advantage of the strong secondary market for those older ships?

Yes. So we actually did do that in a way. I mean we sold, I think, 8 assets of all the vintage over the course of last year. So that movement is more or less already baked in, but we are constantly evaluating, as you point to, what's the right balance for us around maintaining vessels or selling off. We are quite comfortable in operating our fleet right now, to be honest. And we don't see a big price differential between older tonnage and newer tonnage and when we operate in the spot market. So therefore, for now, I don't have a particular sort of pull around offloading more tonnage. But of course, we may decide to sell slightly older vessels if the price is right.

(Operator Instructions) We have the next question from Petter Haugen from ABG.

And sort of I think continuing on the former question. And I want to ask you what you think about the new building opportunities out there now and to what extent TORM would be contemplating to not only on secondhand tonnage, but also new buildings to its fleet?

So we prefer, as you can see, vessels that are on the water now. I mean this is a cyclical industry, and it can be quite volatile over the years. So for now, our preference is for tonnage where we can, I'm going to say, see at least the immediate future. If you then look at, let's say, a 2026 delivery, I think if we were to think about it, it would be to be investments that are difficult to get to by virtue of buying the assets today. My strong preference is for asset today I think it will have to be really something special on price or specially on features capability on an asset that has a long-dated delivery.

Okay. The -- sort of the obvious question here is that, at some point, someone needs to build more ships. These ships, as we all know, deteriorates by the day. And at least one needs some sort of replacement for outgoing tonnage. But I guess then the question how do you suspect the continuation of -- or what do you expect the order book to fleet ratio to stand at if sort of your billion dollars for 2023 comes through? Will we see more ordering, you think, through 2023 if markets holds up as most of us expect?

I think it is definitely conceivable that you will have more ordering, more contracting in 2023 than what you had in 2022, simply because people are also going longer dated I think in 2022, people were probably more reluctant to buy, let's say, a 2025-2026 position today. There's not much capacity left as we discussed. So I think the contracting itself will probably be bigger. But what you will -- what I expect is that it will not, at least in 2025, 2026 climb up of sort of this 3%, 4% that we've been contemplating. And then, of course, when you get into the second half of this decade, what is interesting is to look at the 25-year-old sort of scrapping potential is increasing dramatically once you get out there. As I'm sure you've also looked at, Petter.

Yes. And that's the point there. I'm very curious how...

The way we think about it is that we actually did spend time in China. And in Korea, a little earlier this year when it was opened up. And we sort of -- we have our own view on what is the realistic availability of shipyard capacity in 2025, '26, '27. And we model it here as if all of that will be filled. And when we get that -- that's the extreme case. That's where these shipyards do not get attracted by dry cargo or container or LNG or other segments. And in that scenario, there's still a very manageable order book that you get to. This is all is quite dynamic, obviously, and it is outside of our 2- to 3-year discussion that we've just had. I think that it is totally possible that the fleet -- additional fleet will be subdued at least up to and including 2026.

And then when you get past that point, the fleet that needs to go to recycling is increasing dramatically. That's why we like that in the water now, because we think that there is -- having 88 vessels on the water now. I think it's better, and let's say, having whatever, 60 now and 20 out in the future.

Understood. Understood. Agreed. The final question from my side, the ship per share transaction you just did now. Should we expect more of that for the next quarters?

To be honest, we are quite positive around utilizing our equity part payment, we think it's good for the -- in this case, for the new shareholders, I think they get on board a significant upside potential for them. And for us, we are growing the company without losing the strength of the potential to have the same payout ratios as we've just discussed. So yes, if and when these opportunities arise, we would be willing to entertain that.

There are no further questions from the phone. And I hand it back to Mr. Hein for the web questions.

Thank you. We have no further questions on the web. So this concludes the earnings conference call regarding the results for the fourth quarter and full year 2022. Thank you for participating.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you very much for joining, and have a pleasant day. Goodbye.