Torm PLC (TRMD) 2021 Q4 法說會逐字稿

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

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

Thank you, Andreas, and good afternoon. Thank you all for dialing in. I'm pleased to be here today as we've now published our results for the fourth quarter of 2021. And although the market is still challenged due to the continued stock flows, we did see signs of the market recovery already here in the fourth quarter of 2021 and we ended with an EBITDA of USD 42.9 million and we had a loss before tax of USD 8 million. The return on invested capital ended at 0.8%.

The product tanker fleet here we realized an average TCE rate of close to USD 14,000 per day. Our largest segment, the MR segment achieved rates of USD 13,329 per day, whereas LR1 and LR2 segments obtained rates above USD 15,500 per day. Here now looking into the first quarter of this year, we've -- at this stage, we've seen a further recovery and the bookings we've secured is around USD 15,500 per day. And here, once again, we have outperformed peers in the largest segment in the MR.

Now early part of this year, we did close the last of the sale and leaseback of 9 MRs that we entered into late in Q3 last year on attractive terms and thereby, we have been securing a solid liquidity base and obviously also optionality during and at the end of these leasing periods. In the fourth quarter of last year, we also increased our scrubber commitment to 57 scrubbers, thereby increasing our access to lower fuel prices in the current quite volatile and uncertain market.

Now kindly turn to the next slide to Slide 5. The product tanker market, as I said, remains challenged here in the fourth quarter. Our supply remained insufficient to keep pace with the demand recovery. And therefore [logically] inventories continued to draw. The market here in the Western Hemisphere was nevertheless supported by U.S. Gulf refiners that came back from -- after the outages related to Hurricane Ida and it also coincides with strong import demand from South America and West Africa.

On the other hand, we did see that the market in the Eastern Hemisphere were negatively affected by low product exports, especially from China. Here, at the start of the first quarter, we've seen that there was a disconnect between the traditional rate spread with LR rates, especially in the East falling actually below the MR earnings. And this mainly reflects that there has been a lack of trade on the traditional inter-basin LR routes as a consequence of tight product balances in both East and West. While what we experienced on the MR rates is that they had continued support from robust freight flows within the Atlantic basin and also with part flows into especially Australia.

Slide 6, please. Clearly, when looking at the market, the past week has been an extreme weekend. When we look more at the current prices caused by the Russian invasion of Ukraine and the consequent sanctions on Russia, this has increased uncertainty on the [NESG] markets overall, and it has sent the price of crude as we all can see to the highest level now in 14 years. Now sanctions themselves enforced so far by Western countries are not directly targeting the oil trader, but the uncertainty and reluctance to transport and also to trade Russian oil has sent the crude tanker freight rates in the European market to the highest level seen since the beginning of the COVID-19 pandemic back in spring of 2020.

On the product tanker market, we've also now, over the past 48 hours, started to see increased demand for middle distillates moving from the Middle East to Europe and activity in the U.S. Gulf has been increasing over the past days. So, right now, MR earnings have climbed in the U.S. above USD 20,000 per day and in the Middle East LR rates look to have taken a step up from the low USD 10,000 per day to around USD 30,000 per day if you have a modern scrubber-fitted vessel in the trading window right now.

Given the proximity of Russia to Europe, any rerouting of freight flows is most likely to involve oil flows over longer distances. So increasing the ton mile demand for tankers, for example, if we look at Northwest Europe, import diesel from the Middle East instead of Russian Baltic ports, it would increase the ton mile for the same amount of fuel by around 3x.

Obviously, right now, the developments are unfolding. There is a high complexity around this very unfortunate situation. It is too early to say what the impact would be in the medium term, but right here and now, clearly, the markets are up. In light of the Russian invasion on Ukraine, we have decided in TORM, not to enter into any new business that involves Russian ports. And we have also decided not to enter into any new agreements for Russian accounts.

Please turn to Slide 7. We've been discussing and underlying for some time that artificially low crude oil supply and the resulting inventory drawdowns have kept tanker markets rate at these subdued levels throughout the past 18 months if we look away from the events of last week. The recovery in global oil demand has not been met by a corresponding increase in oil supply and this has resulted in a situation where all inventories have simply continued to be drawn down and in some regions to levels which are below pre-COVID lows.

With the seasonal slowdown in oil demand at the same time as OPEC continues to add barrels to the market, the supply-demand balance is expected to turn over the first quarter of this year if we assume that the Russian oil output is not materially affected by the current crisis. Further, the Russian-Ukraine crisis and the consequently record high crude oil price, reflecting all supply concerns, could potentially also accelerate a nuclear deal with Iran. And as a consequence, up to 1.3 million barrels per day of Iranian barrels could be added to this market, all potentially traveling longer distances and any lost Russian-European oil flows.

At the same time, the lifting of sanctions on Iran could, and in our opinion, would accelerate scrapping of older crude tonnage, which is currently used to transport sanctioned Iranian crude, hence, affecting the tonnage supply side positively as well.

Please turn to the next slide, Slide 8. And here, let me sum up. The main demand drivers influencing the tanker market. We can see that significant progress has been made not only from the peak of the COVID-19 crisis, but also from where we stood a year ago. And although in many cases, we are not back to pre-COVID-19 levels yet, The outlook for the next 12 months indicates further improvements, not least due to the continuing oil demand recovery. Although at higher oil price, this environment could potentially destroy some of the demand that we're seeing if prices on oil will continue to increase.

Now in addition to all of this, OPEC have decided and are continuously sticking to their plan of increasing the crude supply and we expect that this will also support global refinery runs at last in the coming months. Here, it should also be mentioned that with inventories now being drawn down to these low levels, they need to be built up again at some point and which then will act again as a tailwind to tanker demand in addition to some of the other factors I mentioned, more normal trade flows and potentially longer ton mile for the substitution of Russian oil.

Please turn to Slide 9. If we turn to more medium and long-term demand drivers, the COVID-19 pandemic has accelerated the pace of refinery closures with more than 2 million barrels per day of refining capacity already having closed down permanently, and a further almost 0.5 million is scheduled to close down during this year and the next year. On top of that, another 1 million barrels per day of capacity could risk being shut down. Most of the closed capacity is located in regions which are already large importers of refined oil products such as Europe, U.S. West Coast, U.S. East Coast, Australia, New Zealand and South Africa.

At the same time, more than 4 million barrels per day of new capacity is scheduled to come online mainly in the Middle East and China, regions which already today are large exporters of oil. Both these developments are positive for trade flows and ton mile in the coming years with only a few projects, which are less positive for trade. Here, Australia is a good example of a country where 2 out of the 4 refineries closed down during 2021 and refined oil products exports for the year averaged already 13% higher than in 2019, even though oil demand in the country stayed at 11% below the 2019 level at the same time.

And here, kindly turn to Slide 10. And just for reference, kindly utilized the presentation that is available on our website rather than the presentation going live here. And in the presentation on our website, please turn to Slide 10. The positive outlook for demand for product tankers in the next 3 to 5 years, coincides with the supply side, which is the most supportive for at least the past 25 years. With record high new building prices, limited shipyard availability tanker ordering remains muted here in the fourth quarter of 2021.

Consequently, the order book-to-fleet ratio for product tankers is continuously at a historically low level of 6%, further supported by similarly historically low 7% order book-to-fleet ratio for crude tankers. Further, we've seen certain scrap prices, this has incentivized scrapping of product tankers with the highest level of tonnage removed from the market in 2021 since 2010. These 2 drivers support the case of a very modest fleet growth over the coming 2 to 3 years, which we expect to be around 2% a year, only half the pace seen in the past 5 years.

Now to conclude my remarks here on the product tanker market, we expect volatility on the market now to the Russian invasion in Ukraine with a potential for ton-mile increases due to crude and oil products trade rerouting. Continuing improvements in the global oil demand, increasing OPEC supply, as well as the need to rebuild depleted crude and product inventories support the tanker market here. And over medium and long term, the refinery dislocations, the low order book add an extra support for our markets.

Slide 11. Now looking at our commercial performance here, I'm proud that once again, TORM has outperformed the peer averages in 26 out of the last 28 quarters in our largest segment, the MR. And here, in the fourth quarter of 2021, we achieved rates of USD 13,929 per day. And again, I can only congratulate everybody on the One TORM platform in our organization, whether on-board our ships or in our offices that we continue to deliver these outperformance on a day-to-day basis.

Please turn to Slide 12. One of the deciding factors for us when we are achieving our above average [TC unit] this is driven by our continued focus on the positioning of our fleet in the basins where we had the highest earning potential. And here in the fourth quarter of 2021, we had in TORM an overweight west of the Suez where we also saw an outperformance when looking at the full quarter.

Now with that, let me hand it over to you, Kim, for further elaboration here for structure, the liquidity position and also our balance sheet. Over to you Kim.

Thank you very much, Jacob. So please turn to Slide 13. At the end of 2021, we have, as Jacob mentioned, seen a recovery in the tanker market with rates reaching just below USD 14,000 a day in the fourth quarter of 2021 and a further increase going into Q1 of '22, where we fixed 85% of our days at USD 15,569. In the fourth quarter of '21 and in 2021 as a whole, our operating expenses increased mainly due to COVID-19 related expenses. So when we correct for these expenses, our OpEx was slightly lower than the pre-COVID-19 levels of USD 6,354 a day compared to USD 6,371 a day in 2019. We will maintain our focus on cost optimization without the advertising quality and customer focus.

Please turn to Slide 14. Early in 2022, TORM reached the largest fleet ever with 85 vessels across the main tanker segments. A total of USD 320 million was invested in new and secondhand vessels in 2021, whereas we sold 1 vessel, which was delivered to the buyer in 2021. We recently sold 2 older vessels with expected delivery in the first half of 2022. They were sold at attractive prices. So our expansion of the fleet was done while maintaining a conservative debt structure and keeping a strong cash position. Early in 2022, we ended our newbuilding program by taking delivery of the last of the 2 outstanding LR2 scrubber fitted vessels. So, we are now ready to take advantage of a potential market recovery.

Please turn to Slide 15. As of end 2021, TORM had available liquidity of USD 210 million, cash totaled USD 172 million and we had on top of that the undrawn credit facility of USD 38 million. The total cash CapEx commitments related to our newbuildings and scrubbers were USD 48 million as of December 31, 2021. With a strong liquidity profile, the CapEx commitments are fully funded and we have a significant liquidity reserve.

Please turn to Slide 16. Looking at our debt maturity profile, we have no major refinancing until 2026, which combined with our strong cash position provides TORM with financial and strategic flexibility to pursue value-enhancing opportunities in the market should they occur. At this pace, we do not have any major repayments until 2026. Further, in the fourth quarter of 2021 and early 2022, we have increased our interest rate hedges to 90% in the coming 3 years and 85% from 3 to 5 years. Thereby, we are prudently taking out the potential interest rate risk caused by the increases we have seen in inflation levels recently.

Please turn to Slide 17. Regarding metrics such as net asset value and loan-to-value, the value of TORM vessels, including newbuildings, was approximately USD 1.9 billion by the end of the fourth quarter. Outstanding gross debt amounted to USD 1.148 million -- USD 1.148 billion as of December 31, 2021. As mentioned, TORM's sale and leaseback of 9 MR vessels ended up adding USD 74 million to the outstanding debt. With limited committed CapEx and a solid cash position, we have a net LTV of 52%.

So all in all, we have a strong and attractive price debt structure with reputable banks and leasing institutions and we have hence demonstrated our strong access to diversified funding sources in the market, and we are very satisfied with our debt situation. The net asset value was approximately USD 1 billion as of December 31, 2021. And that corresponds to USD 12.5 or USD 82 a day per share -- or DKK82 per share. And I just take before we started this call, where TORM share I'm sure you all know it and follow, it was at DKK52. But I am in conclusion pleased that our conservative balance sheet supports our strategic flexibility, as well as our financial strength.

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

(Operator Instructions) And the first question is from the line of Jon Chappell from Evercore.

Jacob, if I could start with you kind of a 2-parter on the market. I want to re-ask the question I probably asked 3 months ago, which is we lay out such a favorable inventory situation, such a favorable supply side, demand is recovering, OpEx producing, just kind of your views on why we've yet to see an eventless increase -- substantial increase in the markets? And maybe my second part to that is, it was noteworthy to me that you called out RAN and OPEC, the Russian-Ukraine, a lot of things that impact the crude markets. So do you feel that you really need a crude market recovery before the product or even at the same time as a product tanker recovery? Or can one do better without the other?

Okay. Thanks, John. So I think we probably need to like pretend that we are in a world where the current crisis is not affecting the market. We fundamentally are sitting last Wednesday, where we had a discussion with our board about the low likelihood of a worsening crisis in Ukraine, which within 24 hours after that discussion proved to be wrong. But let's just -- if we pause and sort of set the time there, then I would say that what we experienced until that time is that inventories were actually still drawing rather than building and that OPEC were underdelivering on the needs of the world. And clearly, oil prices even without Russian invasion of Ukraine had been creeping up over the past 12 months, of course, also because of the subdued answer in terms of ramp up of production by OPEC.

Now that all leads me to that what we have been experiencing is that crude tankers have still up until this, let's say, a week ago, been cannibalizing into the product tanker space, leading also to what I described before around that you actually had this rather unusual situation with the larger ships earning significantly below in the spot market, what MR, so LR2s significantly lower than MRs, also because of this cannibalization. I believe that fundamentally, we need that situation to change before you will see a real recovery in product tanker rates. That is my thing.

Now fast forward, now one week later, the world has, I think, dramatically changed because the whole ecosystem of crude and also refined oil products is right now under changed because of that ship owners, all traders and end users in general are taking a position generally to be very careful or even shying away from trade with Russian oil and/or transportation of the same oil. And that is changing the landscape.

And as we speak, freight rates for crude tankers have been going up and it is also spilling into our segments, the LR, MR and the rate environment is today higher than what we have seen since early part of 2020. And it is also raising the forward curve significantly. So let's say, a week ago, an LR2 could make probably USD 5,000 per day. Today, what is being discussed is the rate environment in the low 20s. And if you add the scrubber premium, which is clearly going up and it's probably around USD 8,000 on a LR2 today, then you add 30, and it was USD 5,000. So it's a significant step change.

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

Yes, You are sharp always Jon. It is -- we simply -- we have the RCF that we had undrawn and we simply just draw it. It is basically equal to cash, but we decided to draw it. So, it is cash at hand and we can have it there or we can redeem that RCF once again. So that's the reason.

Okay. And then just a final one, if I can slip one more in. You've announced 2 more vessel sales, makes sense, asset values keep going up while the market remains relatively nailed to the bottom. Any more thoughts of kind of playing that asset arb, so to speak, monetizing today with probably some of the older vessels before the rate environment kind of takes off?

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

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

Just a little bit back to the market. I mean rate levels are moving up, but are you seeing actual fixtures yet? Or is it just here say numbers?

So in the clean, that's a good question. As I say, it has already proved to be real fixtures, especially in the crude Aframax segments. And there we are seeing elevated fixtures being concluded, of course, also in the larger segments in Suez and (inaudible). But so far, this is what is driving up also the LR2 rates that is being quoted, but it is within the last 24 to 48 hours. So, it's pretty new. Let's see where it settles, but there is a strong push on rates being quoted right now, but nothing concluded.

Okay. That is interesting. In terms of if -- and I don't know this (inaudible) if you were to replace the Russian diesel volumes to Europe, is there sufficient capacity in other regions to fully replace that on a quick note? Or do you think there is going to be a time lag to do so?

Yes. So that is a very good question that we are also obviously looking into because for the refined -- or Russia -- the impact on Russian oil is a, crude and then b, diesel. And we would say that Russia would need to find new markets for the product that they are currently exporting into Europe and, let's say, the countries that are currently shiny. So if I take it in a simple merit, we start with crude clearly to the biggest buyer of crude from Russia, one of the big is China.

And you could expect what we see is that China is perfectly articulating that they will not put sanctions on Russia. They have also taken some of the Russian controlled tonnage on peer charters to UNIPEC, clearly signaling that they will continue the trade flow on crude between Russia and China. And I think that there is a relatively high likelihood that it will increase from what it was a week ago. There's nothing that would indicate anything different.

Then the question is obviously, what will happen then with the volumes of diesel that is currently produced in Russia and being exported to Europe? What is the new home? And I don't have the answer yet, but our opinion would be that some of it would flow to South America and other part of it would flow to West Africa. And that would sort of make room for other diesel volumes that would normally go into those areas to then go into Europe.

For instance, U.S. volumes that would no longer go to South America or West Africa, but they will be incentivized to sell into Europe to have a redistribution with longer ton mile of the same volumes. That's our main -- that's how we think that it could play out. The ultimate thing is obviously that Russian refiners are no longer producing. I don't think that seems to be somewhere down the road because it's not in there. I mean, their motivation would clearly be even if they need to sell at a discount to other market participant would be to continue the flow.

Yes. I think it's a longer line, so I'm thinking myself. One last question and it's on the refinery shutdowns. You are not listing any refinery shutdowns in China. But my understanding is that some of the new refineries may replace some of the old ones. Is that in line with your thinking? Or do you think it's just going to be -- all refiners are going to continue as they do today?

Yes, a good point. So the way we have described it rather than having the gross new and the gross closure, we have netted it out in the description that we have on the slide. So you see there that we have said that the refinery addition for the year '22, '23 in China is about 1 million barrels per day, and that is net. So there you have more additions, but you also have closures. So that's the net addition.

(Operator Instructions) The next question is from the line of (inaudible).

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

The opportunities that is in the market. Let's see. It's a very volatile market that we have entered in Q2. So, time will tell, but we are always open for the type of opportunity that we saw last year. So one, as you point to, we did a share-based transaction to acquire chemical tankers from -- in cooperation with Team Tankers and we did enter into an agreement to buy not new, but relatively new tonnage in the LR2 segment. So these type of deals would be examples of some that we are still interested in adding to the portfolio. I have nothing concrete at this stage.

All right, makes sense. The current environment is it [serving] the positive impact, the eco component and scrubbers and relative performance. What can of premium are you able to secure in your modern assets versus the older ones? And regarding Q1 guidance, could you approximately quantify the positive effect of scrubbers?

Yes. So, on the modern versus old actually, we have old tonnage in our fleet that have scrubber where the economics is the same as a modern vessel. So, I'm not really seeing a discrepancy in terms of this. This is more of the characteristics around cubic and other things relative to whether it is young or old, that is dictating the earning potential.

Now on the scrubber currently, as I mentioned, the scrubber premium right now in Singapore, the spread is close to USD 300 on between high sulfur and low sulfur. This is only at the very beginning of the 2020 -- implementation bagged in the early part of 2020 that we have seen this. And if you use that as your calculation, then we estimate that LR2s currently right now in that area of the world, having a benefit of around USD 7,000 to USD 8,000 and LR1 USD 5,000 to USD 6,000 and an MR, USD 3,000 to USD 4,000 higher earning potential. But this is very lately that we have seen this only over the past week has the level gone to that.

All right. That's helpful. And final question for me. You have a dividend policy of distributing 25% to 50% of net income as dividends. But as you outlined TORM is trading at a substantial discount to net asset value. Are share repurchases something you would consider in the current environment?

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

There are no further questions at this time. I would like to hand back to Andreas Abildgaard-Hein for closing comments.

Thank you. We have one more question on the webcast from Danske Bank, Håvard Sjursen. It's for you, Kim, can you comment on the sales price of the 2 vessels you have sold and a net cash effect?

The 2 divestments we've made is part of our ordinary replenishment focus, so it's older vessels and one handy -- one of them a handy size that we have divested. We do not usually comment on the precise price that we have sold them forward. But our reference point is, of course, the recent values -- market values of the vessels and we are very satisfied. Regarding proceeds, net proceeds, net liquidity additions, I can disclose here that it's in the level of USD 13.5 million.

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

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