Q2 2021 Torm PLC Earnings Call
Please call regarding the results for the first quarter of 2021.
My name is more of an October I'm head of corporate finance and strategy here at all.
As usual, we will refer to the slides as we go along and 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 our usual safe Harbor statement.
Slide 3 please.
The results will today be presented by executive director and CEO, Yoghurt, Mcgath and CFO Capella.
I will now hand, the call over to Jacob.
And the please turn to slide 4 and thank you very much Martin good afternoon to all and thanks for dialing in.
I am happy to be here today, we published our results for the first quarter of 2021 and.
And I'm of course also quite fleet because we this morning have announced the acquisition of 3 <unk> vessels.
The first quarter of 2021 was impacted by the continued market downturn.
And the COVID-19, pandemic, which lowered the global demand for oil products.
For.
The quarter ended with an EBITDA of $19 million and non loss before tax of $21 million as the consequence return on invested capital was negative at 2.7% which of course is unsatisfactory.
Our product tanker fleet realized an average TCE rate of almost $13500 per day and in the largest segment. The <unk> segment. The achieved rates were just below $13000 per day.
Now looking into here the second quarter, we've secured bookings had almost $15000 per day and we are looking into a stronger result than realized in the first quarter with now 78% of our earning days already covered.
Yeah.
During the quarter and as we previously announced we purchased 8 vessels, partly share based transaction and adding to this fleet increase we've today announced the purchase of 3 modern scrubber fitted vessels for a total consideration of $121 million.
Lastly, we have after the quarter ended also sold 1 older a module sales.
These S&P transactions are all part of our coverage in the S&P strategy that we've pursued over the last year and I will elaborate on here on the following slide So please turn to slide 5.
2021, especially the year also for product tankers impacted by the global pandemic and the related close Toms.
The product tanker market was divided into a brilliant first half and you have to say, our Knoxville flattering second half, resulting of the year ended at loss, making freight rate levels as I mentioned the downturn from the second half of 2020 have so far continued here into 2021.
During this period, we have actively managed our market exposure.
The first in the sale and purchase market, we capitalized the strong market during the second quarter of 2020 and sold 7 older vessels.
This decreased our market exposure through the market downturn that followed.
Over the recent months.
During this market downturn, we've decided to take on additional exposure through the purchase of 8 <unk> vessels and most recently the 3 electric vessels.
The 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 have 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. The cover runs off over the year down to around 50% here in the third quarter.
1.2% in the fourth quarter.
Similarly for the <unk> 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 increased spot exposure and the delivery of the 11 vessels will add to our operational leverage and support our future performance.
Now, let me turn to some of the drivers in the.
Underlying product tanker market and here, please turn to slide 6.
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, especially in Europe, but also in 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 in oil demand recovery and strengthened the short term headwinds for the product tanker market, which was further aggravated by the very weak crude tanker market leader.
Leading to increased crude cannibalization and a lot of cleanups.
The extremely cold weather in the United States. Nevertheless resulted in increased transatlantic flows.
As well as long haul east West flows, we sent 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 in vaccination rates, which has already started to show in all demand figures as well.
Unfortunately.
We have recently seen the dramatic increase in COVID-19 cases in India.
Which of course has made us increasingly concerned with the health of our colleagues in 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 7.
Yes.
As we've been emphasizing for some time now the developments on the product tanker market are 2 of 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.
It's difficult to estimate the exact timing.
The inflection point is expected to be reached once more people get vaccinated countries reopen and the demand recovery gains momentum.
Slide 8 please.
As already mentioned renewed lockdowns have negatively affected oil demand recovery in recent months.
Especially Europe was hot hit in 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 in 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 the 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 the soma and together with China, where all the mandates 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 9.
Since the end of the third quarter last year, India has seen significant improvements in the oil demand. However, recently, we have seen the dramatic increase in COVID-19 cases in the country, which is indeed, a very concerning development with respect to our colleagues in 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 as a consequence, some ship 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.
Okay.
From the oil product trade perspective, the current situation in India will likely not be of negative factor.
<unk> from India's mobility indicators, new restrictions in several regions, we 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 of we will potentially see increasing close of surplus products from the country in the coming months.
Now please turn to slide 10.
And here, let me come back to the United States. I think is an example of a country, where vaccinations have sss shown significant progress.
We've seen improvements in the U S oil demand indicators, along with the fact that almost 60% of the adult population in 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 of the figures show significant improvements.
With the demand improvements and taking into account refinery capacity removals.
In the United States East Coast in recent years, we are already seeing signs of higher importance to the region of 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 inventories have come down from the peak excess levels of <unk>.
<unk> last summer.
As a result of the refinery outages in the U S. Gulf in connection with the extremely cold weather in February part of stocks there even felt from below normal seasonal levels here in March.
This suggests that much of the stock 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 barrels per day potentially at risk of closure.
Most of this capacity is located in regions, which already allowed 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 of account for 7% of the total refining capacity in the worlds largest diesel importing region Europe, 12% of the U S West coast and 28% of the U S.
East Coast capacity.
For Australia, and New Zealand the figures are even more significant true out of for refineries in Australia or closing down and the sole remaining refinery in New Zealand is most likely to be closed down as well.
At the same time, approximately 5 million barrels per day of new capacity is scheduled to come online mainly in the middle East and China. The regions that already today of large exporters of oil products.
Both of these developments are positive for trade flows and ton mile in the post <unk> world.
The only a few products, which are not positive for trade, most notably the <unk> refinery in Nigeria.
Slide 13 please.
The positive outlook for the demand for product tankers in the next 3 to 5 years coincides with the supply side, which is at the most supportive.
For the last 25 years.
The order book to fleet ratio of for product tankers has remained at around 7% for some time now which is historically a low level.
The reason the 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 2020 for which is further supporting the case of <unk>.
Quite modest fee growth in the next 2 to 3 years.
As a consequence, we expect net fee growth in the next 2 to 3 years at around 2% of the year only half the pace seen in the past 5 years.
To conclude our remarks on the product tanker market <unk> expects to see volatility in the market in the short term related to COVID-19, and its impact on global oil markets and economic activity of <unk>.
<unk> from the COVID-19 effects, we see that a number of key market drivers for the next 3 to 5 years.
Remain positive such as as mentioned the refinery dislocation and the 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 in the current lower market environment.
Through our strong cabot's of structure.
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 in the first quarter of 2021 in our largest segment. The amas have outperformed the peer group average in the first quarter of 2021, we achieved rates just below $13000 per day compared to the peer average.
Of $10337 per day this.
This translate into additional earnings of $12 million.
And Joan.
Very satisfied the terms of 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.
In 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 least the balance sheet. Kim. Thank you Jacob Please turn to slide 16.
With our spot based profile from has significant leverage to utilize an increase in the underlying approaching of rates.
The third of first of March of 'twenty 'twenty..1 we have just above 14000 early days in 2021, and almost 30000, the <unk> 'twenty 'twenty 2 adding our just published a low 2 purchases to these numbers the earning days will increase with around 1000 on an annual annualized basis.
For the near term, we have as Jacob as mentioned, however, deliberately checking increased coverage over the last year in anticipation of continued downturn in the market and for the second quarter view of covered 78% at almost $15000 per day.
Please turn to slide 17.
As part of our cover strategy, we use a combination of freight rate derivatives and physical contracts. The straight derivatives have the advantage of providing flexibility in relation to precise timing and size of coverage entering 2020 and throughout the first quarter of 2021, we have benefited from the use of derivatives with the total really.
As the amount of $12.2 million U S dollars. However.
However, the market value development is book in terms of TCE and we have over time seeing fluctuations in our result is driven by changes in the unrealized element of these derivatives.
To amplify.
By the end of March 2021 of the unrealized element of strong freight derivatives had a negative market value of $7 billion.
The value of an increased during April resulting in a positive impact of $5.7 million.
Which was booked in 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 margin momentum towards the end of the quarter and into the second quarter the value of <unk> vessels, including new buildings and commit the second hand purchases or sales.
It's around 7 around $1.7 billion by the end of the quarter.
Outstanding gross debt amounted to $858 million as per 30 <unk> of March 2021.
Finally as per the 31st of all of our 'twenty 'twenty..1 we of outstanding committed Capex of of 2.1 of $10 million related to our new building program and the <unk> business purchase. This includes a noncash element of $55 million.
So our cash position was $170 million.
The net asset value is estimated at $788 million.
The 31st of March 'twenty 'twenty 1.
And this corresponds to 2.6.
Of $67, 1 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 the total of 11 secondhand vessel purchases.
Of the following slides of give some insights into our liquidity position.
Cash 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 of Undrawn credit facilities of $212 million.
Proving the committed and expected financing related to the allowed to purchase and the 2 additional sale and leaseback agreements total pro forma available liquidity was $446 million.
The total cash capex committed commitments related to our new buildings and the Ams second hand vessels purchases were $155 million.
For the 30 <unk> March 2021, this excludes the share based payment related to the EMR purchase.
Including the purchase of the 3 year low twos, the total pro forma pro forma capex commitments of $276 million.
With some strong liquidity profile of the capex commitments of fully funded and very manageable.
Please turn to slide 20.
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 in the market.
As displayed we do not have any major repayments until after 2025.
With that the operator open up for questions.
Yes.
Sure.
Again, ladies and gentlemen, we will now begin the question and answer session sort.
As a reminder, if you wish to ask a question. Please press <unk>.
And 1 of your telephone.
For you. Thank you Danielle.
Once again Thats Star 1 if you wish to ask the question.
And the 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.
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 1 thing to do it for the third LR 2 of your buying but then youre, adding 2 more ships from the existing fleet from from what I understand is there a reason that sale and leasebacks are still necessary given the outlook for the marketing of liquidity situation. Its the bank financing not available at the size of that you need.
I'm just trying to understand the maybe the difference there.
Thank you John for the question very.
Very good question.
We have.
Group of relationship financing institutions.
Thanks, as well for us.
The different leasing.
The partners.
So as such we are trying to make.
The using the using our partnerships, but also establishing a well diversified funding platform.
As you can see we have with the <unk>.
The final.
The SF and then for the buyer.
As seen on the spec.
Scheme showrooms as basically true buildup of.
Diverse platform of different funding sources.
With the propane and <unk> on each of the each of those.
And just.
Correct me, if I'm wrong, but you are adding 2 more ships as part of the sale leaseback for the third LR too.
Yeah, that's correct.
We have the opportunity today in Arizona.
Yes, basically too.
First of all we had the opportunity to on a pretty good for the commercial terms through 2 at the 2 are for.
For the vessels.
And then the.
No.
The.
On the sort of the liquidity on the balance sheet from of liquids and policy perspective, we like to be conservative so sort of having that opportunity.
The Trinity we just out of those also.
As I said on quite decent terms.
Okay.
And then the second thing I would ask about and thanks for clarifying the free derivatives, we see something like a 112% of the second quarter LR..2 days are covered at the start to scratch your head of a little bit.
Just curious on the nimbleness and flexibility around that I mean, it sounds like the majority of them will roll off in the second half of the year. When you have a far more optimistic view about the market. Despite some choppiness maybe for the rest of the second quarter. If you get to early part of June mid June and you think this may be the.
<unk> the recovery may be delayed for another quarter or 2 for whatever the case may be.
Do you have the ability to kind of step up of those derivatives or the for those.
Kind of optimally timed when the market was really at a trough.
And the opportunity to re up on those is kind of past.
Yes.
The appointment.
It is so that there is a delay.
In the expected deal.
The recovery then it would be true later.
We base the outpaced cases, the fundamental recovery for the product the commodity will coincide as I mentioned with the rollout of explanations and reopening of society at large and that is over the course of the second half of the exact timing could be later than the first.
July clearly, but.
But we are willing to take that risk right now and I think that if you stood in the June and you had second thoughts of others, 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 the question some of the data.
You too.
Okay. Our next question comes from the line of.
Bob from SBB. Your line is now open.
Hi, Jacob Kim also a few questions from my side first.
Firstly in terms of your capital allocation, how do you internally evaluate how many vessels and how much debt to take onto your balance sheet. Because you have now been acquiring 8 vessels.
The March an additional 3 now so.
What is the yeah the capital.
The allocation strategy.
Okay, just to clarify perhaps and thank you for the question of the life.
When we take the first the.
8 of the chimp.
<unk> transaction that really didnt.
We read the needed liquidity to.
The purchase of those those were part of the partnership based transaction.
The 60.40.
So so that is quite the.
It was quite nicely the transaction were structured we found and we really like those kinds of structures certainly.
So for that.
The new liquidity needed.
And of course in the in this case.
The 3 year of true.
Different scenario, where we need to sort of liquidity and we've put in place with the <unk>.
Financing as we have displayed.
So of course it depends on the specific.
The.
Structure that we're looking into.
Okay.
Still be in the market for <unk> to purchase additional tonnage.
You have.
So the fleet big enough for for the upcoming recovery as you alluded to.
So I think as the.
<unk>, who depend on the dealer so without over the course of this year, we've done 2 different type of structures.
1 we're basically this cash neutral and where the LTV.
Net came with the team tankers were in line with our own LTV, So thats not really moving the needle on AR.
On an aggregate basis, when you have 60% debt, 40% issuance of yes, it's different.
With the deal we have announced today here you are levering up youre utilizing cash and so the next deal you could say well if we if we were to look at a new project you would have to evaluate what type of structure of it has I would lean towards that the next deal would have to be more or less fully for.
400, <unk> not taken away more cash until at least waynesville recovery.
That's very clear thank you so much.
Okay. Once again, if you wish to ask the question for these plants as part of N..1.
Yes.
Okay. So no further questions at the momentum to continue.
Okay. Thank you.
Don't have any questions from the web either so.
So we hereby the conference call. Thank you all for listening in and have a hell of a good day. Thank you.