Torm PLC (TRMD) 2023 Q4 法說會逐字稿

Good morning.

My name is Rob, and I will be your conference operator today.

At this time, I would like to welcome everyone to the TORM annual report for 2023 conference call.

(Operator Instructions) Thank you.

Mikael Larsen, Head of Investor Relations, you may begin your conference.

Thank you very much, and welcome, everyone, to our webcast, and thank you for joining us.

My name is Mikael Bo Larsen.

I have recently joined TORM as Head of Investor Relations, and I'm very much looking forward to getting up to full speed on this.

Today, we will present our results for the fourth quarter and full year of 2023.

But first, we'll walk you through a short presentation that we prepared for you.

And then as usual, we will take your questions after that.

The call will be recorded and available for replay later.

Before we kick off, however, I would like to draw your attention to one important matter, the Safe Harbor statement on slide number two.

Turning to slide 3, as usual, our presentation will be done by our Executive Director and CEO, Jacob Meldgaard; and our CFO, Kim Balle.

So without further ado, I will now hand it over to Jacob Meldgaard, who'll begin at slide 4.

Thank you very much, Mikael, and welcome here.

Good afternoon and good morning to all.

Thank you for connecting with us for our 2023 results presentation.

We are pleased to present another quarter with healthy financial performance, thus enabling us to reach a new historical high for our full-year results with TCE of $1.084 billion and EBITDA of $848 million, both numbers in line with the expectations we presented back in November last year.

2023 has indeed been an extraordinary year for all of us with both geopolitical tensions and climate changes adding to TORM mild demand.

But firstly, I would like to once again highlight how TORM has performed in this market environment.

We pride ourselves on our One TORM platform and the tradability of our fleet.

And based on this, we've been able to deliver strong performance as shown in the TCE per day numbers.

But 2023 has not only been about current year operations, it has for TORM also been a year where we have made important strategic decisions and actions to ensure that we have the right exposure to what we believe will be a strong product market for some time to come.

Therefore, we have been very active both in renewing and adding to our total fleet capacity and in gradually increasing our exposure to the long-haul segment.

On a fully delivered basis, we now have 90 vessels compared to 78 vessels at the end of 2022.

This is important for us as we see this strategic move as a vital step for our positioning to add future value.

At the same time, we have returned more dividends to shareholders than ever before.

With the proposed final dividend for the year, we are very close to returning $500 million for 2023.

And by this, I believe we have found the right balance between investing in growth and rewarding our shareholders.

And now please forward to slide 5.

In the past two years, the product tanker market has seen great volatility as a result of geopolitical tensions, the Russian invasion of Ukraine in early 2022.

And the introduction of sanctions against Russia has led to a step change in product tanker freight rates towards a higher average level.

Renewed volatility was added to the market as a result of Houthi attacks against commercial vessels in the Red Sea that started at the end of last year and which has led to a large-scale rerouting of vessels away from the Red Sea.

And here, please turn to slide 6.

In essence, the geopolitical tensions we have experienced now for almost two years has reshaped product tanker trade those towards longer distances traveled.

The sanctions against Russia that were officially introduced in early 2023, led to a freight rerouting towards long-haul freight both for European imports, but also for Russian exports which, according to our calculations, added 7% to the product tanker ton mile in 2023.

This happened despite the fact that Europe imported 10% less products after the sanctions were introduced.

So far this year, the current tanker market has been strongly affected by the Houthi attacks against commercial business at the Bab-el-Mandeb Strait.

The attacks have similar lead to freight being redirected towards longer trading distances, this time redirecting this away from the Red Sea to go around the Cape of Good Hope instead.

Depending on the trade route, this has added 30% to 70% to the sailing distance on main trade routes.

Assuming some volumes via the Suez Canal remain, some trade will be redirected towards other regions, and some trade volumes could be lost.

We estimate that the Red Sea disruption is likely to add another 5% to products taken to Oman as long as it lasts.

Here, we made a note that the latest developments with loss of shipper lives is very tragic and highly concerning.

Please turn to slide 7.

Let's look at disruptions at the Red Sea.

Prior to the disruption, around 12% of global clean petroleum product volumes transit at the Suez Canal, while the importance of this sea route has increased with its trade recalibration related to sanctions against Russia.

For the LR2 vessel segment, the importance of this sea route is even more important, with 45% of the clean product volumes lifted on LR2s growing via the Suez Canal.

With the Houthi attacks, the product tanker capacity traveling through the Bab-el-Mandeb has decreased by 46%.

However, the capacity of product tankers transiting in the Suez Canal has fallen a little less by 42%, as exports from the Saudi refineries in Yanbu and the new Jazan refineries are not directly affected by the attacks.

So export from these towards Europe and North Africa can continue.

What is also important to mention here is that we've seen a number of new refineries coming online in the Middle East last year.

However, because of several start-up issues, the incremental production from these new refineries has been limited.

It means that the full impact of exports from these refineries on the product tanker market will first be seen in the coming months when these refineries reach full utilization and will further support the Middle East export capacity with the potential to push more volumes around the Cape of Good Hope.

Now, kindly turn to slide 8.

Along with geopolitics, also fundamental market drivers are supported for the product tanker market.

I already mentioned the new refining capacity ramping up in the Middle East.

This is one part of the refinery dislocation story with refining capacity being added to net exporting regions.

The other part is refinery closures that we have seen in recent years, mostly taking place in net importing regions, leading to higher import volumes and higher demand for product tankers.

As an example of the impact of refinery closures we have seen is Australia and New Zealand, where recent refinery closures have led to a 60% increase in the region's clean oil product imports and hence higher ton-mile demand for product tankers.

Even though we can say that we have seen the main effect of refinery closures in Australia and New Zealand already, imports have risen to a new higher level and continue to keep demand for tankers at an elevated level.

Slide 9, please.

Let's look at the supply side for orders.

After years of subdued newbuilding activity, product tanker ordering at shipyards has picked up last year.

And currently, the order book stands at 13% of the fleet, which is double the ratio seen at the beginning of 2023.

However, here, what is important to mention is that the current order book is spread across almost four years, translating into a 3% annual growth rate.

This compares with an average growth of 4% per year for the past 10 years.

Furthermore, if we compare the order book for product tankers with this year of fleet at above 20 years old, we see that the fleet growth will be relatively balanced.

The 18 product tanker fleet means that the net fleet growth could even turn negative in the second half of this decade, assuming all vessels at or above 25 years would be scrapped.

Another aspect important to mention here is that the recent pickup in new building activity has largely concentrated around the LR2 segment.

Given the versatility of the LR2 fleet, we can trade both clean and dirty products, the LR2 order book should be seen in connection with the dirty Aframax order book.

The combined order book is currently at 13%, which compares with 15% of the combined fleet being candidates for recycling over the same period.

Please turn to slide 10.

To conclude my remarks here on the product tanker market, we expect the main demand drivers on the product tanker continue to be supported.

The global product tanker demand in terms of ton-mile increased last year by 8%, mainly driven by trade recalibration due to sanctions against Russia.

As long as the Red Sea disruptions last, the ton-mile can potentially increase by a further 5% this year.

On the other hand, net fleet growth is much more limited, and we saw no fleet growth in 2023 as a large number of LR2 vessels moved into the dirty market.

So far this year, we've seen increasing number of LR2s cleaning up, but even in case of a potential large-scale net migration back to the clean trade, our calculations show that the product and the demand-supply balance will remain at a much firmer footing than before the geopolitical tension started.

Now with these comments, I will make my conclusion of my part of the presentation.

I'll hand it over to my colleague, Kim, who will walk us through the financials.

Thank you, Jacob.

Please turn to slide 11 for the financial highlights for the fourth quarter of 2023.

Our earnings development during the fourth quarter once again show strong performance, driven by both market dynamics and operational execution in our business.

TCE was $267 million, reflecting a combination of the increased underlying ton-mile demand seen for some quarters now and the current geopolitical tension that added further to this.

TORM achieved TCE rates of $37,985 per day with LR2s at $44,048, LR1s at $40,498, and MRs at $36,122 a day in Q4.

Our fleet had a total of 7,312 earning days, i.e., marginally lower than the 7,494 days we expected back in early November as we made some changes in the drydocking schedule and changes in delivery schedules for business, so basically all due to period shifts.

During the quarter, we made profit from sale of business of $40 million.

Our unadjusted EBITDA for the quarter amounted to $234 million, including unrealized losses on FFA agreements of around $11 million.

Net profit amounted to a very satisfactory $185 million, corresponding to an EPS of $2.18. Based on our distribution policy, the Board of Directors will propose a final dividend for the quarter of $1.36 per share to be paid out subject to approval at the AGM in April.

This corresponds to a payout ratio of 87% based on net profit adjusted for profit from sale of business in Q4.

Please note that the increase in outstanding shares in the ratio is due to the share issuance expected during Q1 and Q2 2024.

Please turn to slide 12 for the full-year financials.

TCE grew to a record high of 1 point previous historical high in 2022.

As previously mentioned, both geopolitical conflicts and climate-related factors as the drought in Central America that has reduced traffic through the Panama Canal added through the ton-mile demand.

This has enabled us to achieve TCE rates of $37,124 per day with LR2s at $44,048 per day, LR1s at $40,498 per day, and MRs at $36,122 per day.

We believe these are strong numbers, and added together, they reflect a very satisfactory performance, where we've been able to increase the TCE rate per day by almost $3,000, whilst increasing OpEx only with $144 per day.

All in all, we are very pleased with the numbers which evidenced strong execution throughout the year.

Based on our earnings and continued focus on disciplined capital allocation, we have achieved a return on invested capital of 30.4% for the full year, and further by actively using our shares as part of the consideration when acquiring new business, we maintain an LTV ratio below 30%.

Adding the proposed dividend for the last quarter to the dividend paid out over the previous three quarters, we get to a distribution of $5.78 per share which corresponds to a payout ratio of 83% for the full year when adjusting for vessel sales.

Please turn to slide 13.

Our primary safety KPI is lost time accident frequency and measures accidents per 1 million exposure hours.

In 2023, TORM's safety performance was 0.32, and our target for 2030 is 0.3 while we believe it was a satisfactory result.

With respect to women in leadership positions onshore, TORM has been on a stable level for a number of years.

And admittedly, we still have some way to go in order to reach our target.

We believe that diverse teams led by diverse leaders gives a better business performance.

Thus, TORM will focus even further on gender diversity in leadership to meet our 2030 target of 35% of women in leadership.

And finally, TORM continues to work towards the 2030 carbon intensity reduction target of 45%.

We are already close to meeting the accelerated 2025 target of 40% reduction in carbon intensity, having reached 39.6% reduction at the end of 2023.

Looking ahead, we are committed to making further progress on this, and we will pursue an ambitious climate agenda whereby we will have zero CO2 emissions from operating our fleet by 2050.

Please turn to slide 14.

On this slide, we show the development of our vessel values reaching $3.1 billion by the end of the year and NAV amounting to $2.8 billion.

Also on this slide, you can see our net interest-bearing debt at the end of the year amounted to $774 million and a net loan-to-value of 27.6%, while we, at the same time, have both increased our fleet and returned significant cash to our shareholders.

Early January, we issued a $200 million five-year senior unsecured bond in Norwegian market, which was used to partially finance five of the vessels acquired in the fourth quarter of 2023, including full repayment of a bridge facility in connection with that acquisition.

Slide 15, please.

I've already touched upon the strong cash generation to our shareholders on cash return to our shareholders.

So this slide details how we are thinking about dividend payout ratio.

Our net targets for the full year amount to $648 million where $50 million stem from profit from sale of vessels, i.e., adjusted profit for the year amounts to $598 million, excess liquidity above a threshold cash level.

The Board of Directors will approve a final dividend for Q4 2023 of an amount of approximately $126.3 million.

Thus, we would expect total dividends for the full-year 2023 to amount to for $497 corresponding to the payout ratio mentioned at 83%.

Going forward, TORM will amend the distribution policy slightly where the built-in mechanism for the earmarked proceeds will no longer be part of the policy.

Further, in addition to dividends, TORM will, as usual, consider share buybacks.

Slide 16, please.

Here I will talk about the outlook for 2024.

We guide TCE earnings to be in the range of $1 billion to $1.035 billion, highly guiding to a result marginally higher than what we realized in 2023.

And we have a range that is reflecting the volatility we have in freight rates due to the current geopolitical tensions.

Further EBITDA is expected to be in the range of $700 million to $1.050 billion against $884 million in 2023.

In the first quarter of 2024, we expect to have 7,703 earning days.

And for the full year, we would expect to have 31,504 earning days.

You should note that in early January this year, we acquired one additional LR2 vessel and the two LR1 vessels and one MR vessel we sold back in 2023 was delivered in the beginning of January.

Based on our rates and cover as of March 4, 2024, we have placed a total of 82% of our earning days and $45,036 in the first quarter across the fleet.

And likewise, based on our rates and cover as of March 4, 2024, we have placed a total of 25% of our earning days at $44,089 for the full year across the fleet.

And now please turn to slide 17. 2023 was a year of strong execution, not only in terms of financial performance, but also we believe in terms of strengthening our position in the product tanker market by adding exposure to the LR segment to further capitalize on the strong unchanged margin fundamentals.

And so we have acquired 23 vessels over the course of the last 14 months, i.e., from the start of 2023 until now.

And for 16 of those, we have arranged for the consideration to be partly share based.

We see this as a unique strength of our share, and it gives us the opportunity to add additional flexibility to our financing of acquisitions.

By doing this, we adhere to the conservative approach towards what we think is a comfortable capital structure, thus increasing the net interest-bearing debt firmly at an estimated $280 million and instead opting to issue new shares to fund our expansion endeavors.

This strategy not only ensures a healthy balance sheet, but also underscores our commitment to sustainable growth and long-term value creation for our shareholders.

And with this, it concludes my part of the presentation, so I will now hand it back to the operator who will take care of the Q&A session.

Thank you very much.

(Operator Instructions) Jon Chappell, Evercore.

Thank you.

Good afternoon.

Kim, just super quick update on the modest change to the dividend policy.

Can you just walk us through the reasoning behind that?

Yeah.

Thank you, Jon.

I can do that.

It's basically rather simple.

Based on feedbacks and also our own experience, we found it to be slightly complex having the earmarked proceeds account, so we basically just deleted that.

But else, we are committed to, as I said earlier, the shareholder return, of course.

And it's basically just that to remove that slightly complex part of the policy.

Else, everything is still in place.

It is still based on the Board's discretion, and we will maintain the, as I said, the same focus on the high dividend distribution going forward.

Okay.

Thank you.

Jacob, from the press release, as you talked through the fleet evolution over 2023, you noted the attractive returns that you saw from having a larger share of the bigger vessels.

I understand that from a trade flow perspective, but maybe from a supply side or capacity side, maybe the MRs are quite more constrained than LR2/Aframax fleet.

So as you think about the fleet going forward, do you think you'll continue to push towards more LR2 longer haul bigger carrying capacity exposure?

And is that strictly a demand side environment, or is there more flexibility around how you view the total utilization balance between capacity additions as well?

Yes, thanks for that, Jon.

So I think, as I look back then, we have followed a number of years being believers in that the expansion of the refinery sector in the Middle East with everything else being equal command longer haul trades.

And when you have longer haul trades, then from a customer perspective, it's more efficient to have larger ships.

So that has been a focus for us over the years to maintain a presence in that segment because we believe here going forward that that will play a vital role.

So when we had that opportunity, and now we've added one more of to double up our exposure in that segment to now a total around 20 ships having sold some and added some.

I think that simply, at that time, felt like a -- feeling very well with our strategy.

The point where we sit now, I think we are a more balanced fleet conversation between LRs and MRs.

So I think going forward, we'll be quite open minded around the opportunities that come our way.

But I'm not sure that I think that MR is fairly much better case because actually you may have an aging fleet that is more pertaining to LR2s than best efforts in addition to MRs on a relative scale.

And that the dominance (inaudible) without being reordered.

I think, just a final comment, is that I'm personally not of the opinion that all the LR2 orders that we now put into the bracket of LR2s that they will be operated as LR2s.

If you look detailed into who has ordered these vessels, a lot of them are natural Aframax players who are just buying an optionality to potentially, of course, trade in LR2s, but while renewing their fleet seen from an Aframax perspective.

Yeah, that's very helpful.

And one more, if I may, just bigger picture market.

It was noteworthy that you called out the 5% potential impact to ton-miles from the Red Sea.

If we go back maybe a year ago, a year and a half ago, you had identified a 7% impact from Russia, Ukraine sanctions.

As you look back and have some more time to digest the impact of the first geopolitical event in Russia and Europe, has that 7% played out as you expected?

Has it been greater, maybe more volatile, stickier, so to speak, as opposed to maybe the Red Sea, which may be a bit more fleeting?

Just a little bit of a retrospect on how things have evolved over the last two years just given the geopolitics that we know.

Yeah.

So somehow, we on average is 8%, so we were a bit -- probably a little bit careful in calling 7%, but it has been volatile, as you point to.

So I would expect that to continue at the same levels that we've had but, of course, with the volatility.

As I also stated around the Red Sea disruption, we see this as something that is -- something that has now been turned on that you got it.

My hope is that it can disappear as quickly as it came, which is different than I think our interpretation of the European sanctions on import of Russian oil.

I think that is very sticky for many reasons.

Obviously, the Red Sea situation could potentially be resolved quickly.

Now it has been escalating, especially over the past 24 hours.

But now, unfortunately, with loss of lives of innocent seafarers.

So it's not going away right now, as we are now on this call, but my point would, of course, be that that one is a temporary thing that hopefully can be solved quickly.

I don't think that the conflict around Ukraine is temporary.

Right.

Yeah.

Okay.

That makes a ton of sense.

Thank you, Jacob.

Thanks, Kim.

(Operator Instructions) And there are no further questions.

This does conclude today's conference call.

Thank you for your participation, and you may now disconnect.