Q1 2021 Torm PLC Earnings Call
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Yeah.
Okay.
Yes.
After the tone, please clearly state and spell your first and last name and company name followed by the hash key.
And David Brown IRA.
Through the market downturn that followed.
Or the recent months during this market downturn, we've decided to take on additional exposure through the purchase of eight am on vessels.
Vessels and most recently these three electric vessels.
A total of 11 vessels will all be delivered during the second and the third quarter of 2021.
Now in terms of employment strategy and coverage. We also conducted a number of activities.
And the anticipation of a market downturn, we increased our coverage from the second quarter of 2020 onwards. This was done through uses of both time charter employment and freight derivatives.
Especially for the first half of 2021, we decided to take additional cover and as of today, we have covered almost the entire fleet for the remaining second quarter call.
<unk> runs off over the year down to around 50% here and the third quarter and around 20% in the fourth quarter.
Similarly for the M on vessels, we've covered 71% of the days here remaining in second quarter, which will reduce gradually to 22% coverage for the third and 10% coverage for the fourth quarter.
The.
<unk> spot exposure and the delivery of 11 vessels will add to our operational leverage and support our future performance.
Now, let me turn to some of the drivers and the underlying product tanker market and here. Please turn to slide six.
And now more than a year into the COVID-19, breakout and global pandemic the product tanker market continues to be affected by local breakouts and lockdowns.
This year started with renewed Lockdowns is basically in Europe, but also and parts of Asia due to a second wave of COVID-19 cases, and the emergence of a new more transit miserable variant of the virus.
This resulted in a temporary reversal and oil demand recovery and strengthen the short term headwinds for the product tanker market, which was further aggravated by the very weak crude tanker market.
Leading to increased crude cannibalization and Ala cleanups.
The extremely cold weather and United States. Nevertheless resulted in increased transatlantic flows.
As well as long haul east West flows, we sent a law to spot rate benchmark temporarily above $20000 per day.
Since then several countries in Europe have started to open up again, while in the U S. We're seeing really good progress and vaccination rates, which has already started to show and all demand figures as well.
Unfortunately, we have recently seen a dramatic increase in COVID-19 cases in India.
Which of course has made us increasingly concerned with the health of our colleagues and India, and which is causing operational challenges for the shipping industry as a whole I will touch upon this a little later in the presentation.
But for now please turn to slide seven.
Yes.
As we've been emphasizing for some time now the developments on the product tanker market are to a large extent explainable by movements in product stockpiles.
And the inflection point on the product tanker market will most likely be reached once the current stock drawing phase and <unk>.
It's difficult to estimate the exact timing, but the inflection point is expected to be reached once more people get vaccinated countries reopen and the demand recovery gains momentum.
Slide eight please.
As already mentioned.
Renewed lockdowns have negatively affected all demand recovery in recent months, especially Europe was hot hit and the beginning of the year.
Where we have seen oil demand declining compared to the levels seen at the end of last year.
Nevertheless, we remain confident that with accelerating vaccine rollouts the virus gets under control and the affected countries can reopen leading to a wider recovery and the macroeconomic activity and oil demand.
And indeed, if we look at the recent developments in the U S. The vaccination rates has shown strong progress and latest all demand indicators show improvements towards pre COVID-19 levels.
It is most likely that there will be a difference in house fast different regions with progress with vaccinations and many developing countries might lag behind here, but.
But I think that we can assume that Europe will reach some sort of immunity over soma and together with China, where our oil demand is already back and above pre COVID-19 levels as well as the United States. These regions together cover as much as half of the global oil demand.
And.
Sure.
Please turn to slide nine.
Since the end of the third quarter last year, India has seen significant improvements and oil demand. However, recently, we have seen a dramatic increase and COVID-19 cases in the country, which is indeed, a very concerning development with respect to our colleagues and India as well as the country's total population.
The situation in India is also causing operational challenges as several countries have imposed restrictions on ships that have made protocols in India and.
And as a consequence, some cheap operators are no longer willing to call engine ports.
We are of course carefully monitoring the development, but we do expect to be able of fully maintaining operations also through this difficult period.
From the oil product trade perspective, the current situation in India will likely not be a negative factor judging from India's mobility indicators, new restrictions and several regions will have a significant effect on the country's demand for transport fuels.
And taking into account the country's status as a net product export and we will potentially see increase and close of surplus products from the country in the coming months.
Yes.
Now please turn to slide 10.
And here, let me come back to the United States I think it is an example of a country where vaccinations have assets shown significant progress.
And we've seen improvements and the U S. All demand indicators, along with the fact that almost 60% of the adult population and the country has commenced vaccinations.
Demand for core products, such as gasoline and diesel has shown significant improvement since the beginning of the year with diesel demand actually already above seasonal pre COVID-19 levels, while gasoline demand has climbed from 14% below the 2019 levels at the start of the year.
Currently around 5%, 6% below the 2019 level.
Jet fuel demand is still well below pre COVID-19 levels, but even here flight travel figures show significant improvements.
With these demand improvements and taking into account refinery capacity removals in.
In the United States East Coast in recent years, we are already seeing signs of higher importance to the region a hit of the summer driving season.
And with the recent cyber attack on the colonial pipeline near term imports to the U S East coast are likely to get an extra boost.
Please turn to slide 11.
If we look at the latest floating stores and onshore inventory data, we can see that floating storage is more or less back to what we consider a normal level and global onshore product and inventories have come down from the peak excess levels.
Seen last summer.
As a result of the refinery outages in the U S Gulf and connection with the extremely cold weather in February and Port stocks, there even felt from below normal seasonal levels here in March.
This suggests that much of the stroke, drawing is behind us, meaning less headwinds for the product tanker market once the demand recovery gains momentum.
Please turn to slide 12.
If we look at the more medium to long term market drivers. The COVID-19 pandemic has accelerated the pace of refinery closures with more than 2 million barrels per day of refining capacity, having closed down and another 1 million barrel per day potentially at risk of closure.
Most of this capacity is located and regions, which already allow importers of refined oil products, such as Europe U S West coast.
U S East Coast, Australia, New Zealand and also South Africa.
To illustrate the significance of the mentioned refinery closures refineries closing down or at risk account for 7% of the total refining capacity and the worlds largest diesel imports, reaching Europe, 12% of the U S West coast and 28% of the <unk>.
With east coast capacity.
And for Australia, and New Zealand the figures on even more significant true on a four refineries in Australia or closing down and the sole remaining refinery and New Zealand is most likely to be closed down as well.
At the same time, approximately 5 million barrels per day of new capacity scheduled to come on line, mainly in the middle East and China. The regions that already today, a large exports of oil products.
Both these developments are positive for trade flows and ton mile in the post <unk> world.
There are only a few products, which are not positive portrayed most notably the thank god and refinery in Nigeria.
Slide 13 please.
The positive outlook for the demand for product tankers and the next three to five years coincides with the supply side, which is at the most supportive.
For the last 25 years.
The order book to fleet ratio for product tankers has remained at around 7% for some time now which is historically a low level.
The reason and record high new building ordering in the container segment has filled up shipyard capacity and made it more difficult to order product tankers with delivery before 2024, which is further supporting the case of a quite modest fee growth in the next two to three years.
As a consequence, we expect net fee growth and the next two to three years at around 2% a year only half the pace seen in the past five years.
To conclude our remarks on the product tanker market tone and expect to see volatility in the market and the short term related to COVID-19, and its impact on global oil markets and economic activity.
Aside from the COVID-19 effects, we see that a number of key market drivers for the next three to five years.
Remain positive such as as mentioned the refinery dislocation and and low order book, which will provide underlying support to product tankers over the longer term.
Following the market dynamics I believe Tom is well positioned to both maneuver and utilize the opportunities and the current lower market environment.
Through our strong capital structure.
And I further believe we are well positioned to utilize the coming market strength through our operating levels leverage and our integrated platform.
Please turn to slide 14.
Looking at Tom's commercial performance I am pleased that we again here and the first quarter of 2021 in our largest segment. The amas have outperformed the peer group average and the.
First quarter of 2021, we achieved rates just below $13000 per day compared to a peer average of $10337 per day. This translate into additional earnings of $12 million.
And Jill.
I'm very satisfied that <unk> operational platform continues to deliver competitive TCE earnings.
Slide 15 please.
A key deciding factor for delivering this above average TCE is driven by our continued focus on positioning of our vessels in the basins with the highest earning potential at any given time and.
And the first quarter, we had a slight overweight west of Suez.
With the general market actually being at relative similar levels across these main basis, when we look at the full quarter.
Now ill hand, it over to Kim for further elaboration on our operating leverage the cost structure and not leave the balance sheet. Kim. Thank you Jacob Please turn to slide 16.
With our spot based profile <unk> has significant leverage to utilize and increase and the underlying approaching and rates.
Third and first of March 'twenty 'twenty. One we are just above 14000, and early days and 2021, and almost 30000 and <unk> and 'twenty 'twenty two adding our just published a low to purchases to these numbers the earning days will increase with around 1000 and on an annual annualized basis.
For the near term we have as Jacob has mentioned however, deliberately taking increased coverage over the last year and anticipation of continued downturn and the market and for the second quarter, we have covered 78% at almost $15000 per day.
Please turn to slide 17.
As part of our coverage strategy, we use a combination of freight rate derivatives and physical contracts. These rates derivatives have the advantage of providing flexibility in relation to precise timing and size of coverage and during 2020 and throughout the first quarter of 2021, we have benefited from the use of derivatives with a total realized.
The amount of $12 2 million U S dollars.
However, the market value development is book and Toms <unk> and we have over time, she and fluctuations in our result is driven by changes in the unrealized element of these derivatives.
And to amplify.
And by the end of March 2021, the unrealized element of from freight derivatives had a negative market value of $7 billion the day.
And then increased during April resulting in a positive impact of $5 $7 million, which was improved and our TCE during April.
Please turn to slide 18.
I would now like to review our financial position in terms of key metrics, such as net asset value and loan to value.
Vessel values have decreased slightly during the first quarter by around 2% with a positive momentum towards the end of the quarter and into the second quarter the value of <unk> vessels, including new buildings and committed second and purchases.
It's around seven around $1 $7 billion by the end of the quarter.
Outstanding gross debt amounted to $858 million as per 31st on March 2021.
Finally as per 31st on March 2021 we have outstanding committed capex of two on a $10 million related to our new building program and the Ams secondhand vessel purchase this includes and noncash element of $55 million.
So our cash position was $170 million.
The net asset value is estimated at $788 million as per.
31st on March 2021, and this corresponds to $10 $6 or $67, one Danish kroner per share and just before commencing this call Tom share was trading at just below 53 Danish kroner.
I am pleased that our strong balance sheet has provided us with the strategic flexibility to increase our fleet over the past month with a total of 11 secondhand vessel purchases on.
And on the following slides I will give some insights into our liquidity position capex commitments and our debt profile.
Please turn to slide 19.
As of 31 March 2021, Tom had available liquidity of $329 million cash.
Cash totaled the $117 million and we had undrawn credit facilities of $212 million, including the committed and expected financing related to the allowed to purchase and two additional sale leaseback agreements total pro forma available liquidity was $446 million.
The total cash capex committed commitments relating to our new buildings and DMR second hand vessels purchases were $155 million as per 30 <unk> March 2021.
This excludes the share based payment related to the EMR purchase include.
Including the purchase of the three year low twos, the total pro forma pro forma capex commitment stands at $276 million.
With some strong liquidity profile the capex commitments are fully funded and very manageable.
Please turn to slide 20.
And also having finalized the refinancing last year, we have eliminated all major refinancing until 2026, which provide us with financial and strategic strategic flexibility to pursue value enhancing opportunities and the market.
As displayed we do not have any major repayments until after 2025.
With that I will let the operator open up for questions.
Again, ladies and gentlemen, we will now begin the question and answer session.
So a reminder, if you wish to ask a question. Please press star and one on your telephone and thank you.
Thank you Danielle.
Once again Thats star and one if you wish to ask a question.
And our first question comes from the line of Jon Chappell from Evercore. Your line is now open.
Okay.
Got it.
Kevin if I could start with you.
And the liquidity situation seems fantastic Theres, no big debt amortization coming up you seem to be getting debt financing for all of the purchases that you made and you have a very optimistic view on the market I'm just curious why continuing to do sale leasebacks, which would be higher cost debt by definition.
It's one thing to do it for the third LR two you're buying but then you are adding two more ships on the existing fleet from from what I understand is there a reason that sale and leasebacks are still necessary given the outlook for the market and your liquidity situation and just the bank financing not available at the size that you need.
And I'm just trying to understand maybe the difference there.
Thank you John for the question.
Very good question.
We have.
Group of relationship financing institutions.
And as well for us.
And different leasing.
And the partners.
So as such we are trying to make.
Using our <unk> using our patent partnerships, but also establishing a well diversified funding platform.
So as you can see we are we have.
The Ela tools.
<unk> finished.
And as CSF and then further.
Our sales leaseback.
Scheme, so and as a spacing to build up and diverse platform of different funding sources.
And with the propane and <unk>.
And so on each of the each of those.
And just.
Correct me, if I'm wrong, but you are adding two more ships as part of the sale and leaseback with a third LR too.
Yeah, that's correct we.
We have the opportunity today and there is in English.
Yes, basically too.
First of all we had the opportunity to on a pre.
Good day commercial terms through two assets through a further vessels.
And then the <unk>.
<unk>.
And on sort of liquidity on our balance sheet from a liquidity and balance sheet perspective, we like to be conservative so and so having that opportunity opportunity. We just added those also.
And as I said on quite decent terms.
Okay.
And then the second thing I would ask about and thank you for clarifying the freight derivatives and you see something like a 112% of the second quarter LR two days recover do you start to scratch your head a little bit.
Just curious on the nimbleness and flexibility around that and it sounds like the majority of them will roll off and the second half of the year. When you have a far more optimistic view about the market. Despite some choppiness and maybe for the rest of the second quarter. If you get to early part of June mid June and you think this may be day.
<unk> the recovery may be delayed for another quarter or two for whatever the case may be.
Do you have the ability to kind of step up those derivatives for those kind of optimally timed when the market was really at a trough and.
And the opportunity to re up on those is kind of past.
Yes, I think to your point on it.
If it is so that there is a delay.
In the expected too.
Recovery than it would be too later.
And we base our base cases.
Fundamental recovery for the product and commodity will coincide as I mentioned with the rollout of explanations and reopening.
Societies at large and that is over the course of the second half of the exact timing could be later than.
The first of July clearly, but.
But we are willing to take that risk right now and as I.
I think that if you stood in June and you had second thoughts about this that's probably going to be too late as you point to the position. We have now we've taken some time ago alone is not new for CFS obviously.
Yes that makes sense alright, thank you Jacob Thanks Kim.
Thanks for question and some of the data.
You too.
Okay. Our next question comes from the line of Rick back from SBB. Your line is now open hi.
Hi, Jay Kevin and Kim also a few questions from my side first.
Especially in terms of your capital allocation and how do you internally evaluate how many vessels and how much debt to take onto your balance sheet. Because you have now acquiring eight vessels.
In March and additional three now so.
And what is the.
The capital allocation strategy.
Okay, just to clarify perhaps and thank you for the question on real life.
When we take the first.
Eight.
Tengiz transaction that really didnt.
And we read the media and your liquidity to purchase those those we're a party partly share based transaction.
60 40.
And so so that is quite.
It was quite nice sales transactions were structured we found and we really like those kinds of structures certainly so so for that.
The liquidity needed.
And of course, and the and this case.
<unk>.
Different scenario, where we needed some liquidity and we've put in place with our financing as we have displayed.
So of course it depends on the specific.
And structure that we're looking into.
Okay.
And still be and the market to purchase additional tonnage.
Do you have.
As your fleet.
For the upcoming recovery as you allude to.
So I think as Kim pointed to depend on the dealer. So there is.
Now over the course of this year, we've done two different type of structures.
And one where basically this cash neutral and where the LTV.
And that came with the team tankers were in line with our own LTV, So thats not really moving the needle on.
And on on aggregate basis, when you have 60% debt, 40% issuance of yes, it's different.
And with the deal we have announced today here you are levering up youre utilizing cash and so the next deal you could say if we if we were to look at a new project you would have to evaluate what type of structure and I would lean towards the next year would have to be more or less fully funded.
I am not taking away more cash until at least way into a recovery.
That's very clear thank you so much.
Okay. Once again, if you wish to ask a question Please press star and one.
Okay, Sir no further questions at the moment. Please continue.
Okay. Thank you.
We don't have any questions from the web either so.
So we are hereby and the conference call. Thank you all for listening in and have a good day. Thank you.
Okay that does conclude our conference for today. Thank you for participating and May all disconnect.
Okay.
And.
And.