Q4 2021 Torm PLC Earnings Call
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Ladies and gentlemen, thank you for standing by.
Natalie your chorus call operator.
Welcome and thank you for joining Tom plc fourth quarter 2021 results call.
Throughout today's recorded presentation, all participants will be in a listen only mode.
This presentation will be followed by a question and answer session.
If he would like to ask a question you May press star followed by one on the Touchtone telephone.
Please press the sake for zero for operator assistance.
I'd now like to turn the conference over to Andrea <unk>. Please go ahead.
Thank you and thank you for dialing in and welcome to <unk> Conference call regarding the results for fourth quarter of switches once you won.
My name is Anthony as I recall heartland.
Investor Relations Central shortly 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 two.
Before commencing I would like to draw your attention to the Safe Harbor statement.
Please turn to slide three.
The results will be presented by our executive director and CEO , Jacob Milka and CFO Kimberly.
Please turn to slide four I will now handover.
Jacob.
Okay. Thank you Andreas and good afternoon. Thank you all for dialing in.
Yeah.
Pleased to be here today as we have now published our thoughts for the fourth quarter of 2021.
Although the market pistol Jones Q.
Two the continuous stockpiles, we did see signs of market recovery already here in the fourth quarter of 2021, and we ended with an EBITDA of $42 9 million and we had a loss before tax of $8 million.
The return on invested capital ended at 8%.
The product tanker fleet here, we realized an average TCE rate of close to $14000 per day, our largest segment the <unk> segment achieved.
Rates of $13 $329 per day, whereas in the one and two segments obtained rates above 15 five per day.
You are now looking into the first quarter of this year. We are at this stage we've seen a further recovery in the bookings we've secured is around $15500 per day.
And once again, we have outperformed peers in the largest segment in the EMR.
Now early part of this year, we did close the loss.
Cost of the sale and leaseback of mining Mas that we entered into late in Q3 last year on attractive terms and thereby we.
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 $2 57 scrubber Stephane.
We are increasing our access to lower fuel prices.
The current quite volatile and uncertain market.
Now.
Kindly turn to the next slide to slide five.
The product tanker market as I said remain challenged here in the fourth quarter.
<unk> supply.
Remained insufficient to keep pace with the demand recovery and therefore logically inventories continued to grow.
The market here in the Western Hemisphere was.
Nevertheless, supported by U S Gulf refiners that.
It came back from after the outages related to Hurricane Ida and it also coincides with strong import demand from South America and with Africa.
On the other hand, we did see the market in the eastern hemisphere were negatively affected by.
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 rich Brett with <unk>, especially in the east falling actually below the <unk> and this mainly reflects that there has been a lack of trade on the traditional interfaces allow routes. That's a consequence of type product balances in both east and west.
While what we experienced on the EMR races that.
Sure.
Yes.
Continued support from robust trade flows within the Atlantic Basin and also.
With part flows in Swiss basically Australia.
Slide six please.
Clearly.
We're looking at the market the past week has been an extreme weekend when we look more.
At the current.
Prices caused by the Russian innovation of you Craig and the consequent sanctions on Russia. This has increased uncertainty on the any key markets.
And it has set the price of crude as we all can see to the highest level now in 14 years.
No.
Himself enforced so far by western countries.
Directly targeting the oil trade, 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 distillate moving from the middle East to Europe and activity in the U S. Gulf has been increasing for deposit base. So right now <unk> earnings.
We have clients in the U S above $20000 per day and in the Middle East LR rates look to have taken a step up from the low $10000 per day to around $30000. Today. If you have a modern scrubber fitted vessel in the trading window right now.
Given the proximity of Russia to Europe , any rerouting of trade flows is most likely to enroll autos over longer distances.
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 three times.
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 it will be in the medium to input right here and now clearly the markets are up.
In light of the.
Russian innovation on Ukraine, we have decided into them 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 seven.
We've been discussing and underlying for some time that artificially low crude oil supply and the resulting inventory drawdowns have kept tanker markets great at subdued levels.
Throughout the past 18 months.
If we look away from the events of last week the.
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 draw down and in some regions to levels, which are below pre COVID-19 loose.
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 return over the first quarter of this year, if we assume that the Russian oil output has not materially affected by the current crisis.
Further.
The Russia, Ukraine crisis, and consequently record high crude oil price.
<unk> oil supply concerns could potentially also accelerate our nuclear deal with Iran and.
And as a consequence up to a $1 3 million barrels per day of Iranian barrels could be added.
This market all potentially traveling longer distances than any lost Russian European oil flows.
At the same time, the lifting of sanctions on Iran.
Crude and in our opinion would accelerate scrapping of older tonnage, which is currently used to transport sanctioned Iranian crude hence effecting the tonnage supply side positively as well.
Now please turn to the next slide.
Slide eight.
And here, let me sum up the main demand drivers influencing the <unk>. 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 northeast due to the continuing oil demand recovery although it.
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 continuously.
Sticking to the plan.
Increasing the crude supply and we expect that this will also support global refinery runs that locks in the coming months.
Here that should also be mentioned that with inventory is now being drawn down to these low levels the need to be built up again at some point and which then we'll ask 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 nine.
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 half a million is scheduled to close.
During this year and next year.
On top of that another 1 million barrels per day of capacity could risk being shut down most of the clothes capacity is located in regions, which are already large importers of refined oil products, such as Europe U S West Coast East Coast, Australia, New Zealand and.
South Africa.
At the same time more than 4 million barrels per day of new capacity scheduled to come online mainly in the middle East and China regions, which already today a loss exports for us.
Both these developments are positive for trade flows and ton mile in the coming years with only a few products projects, which are less positive footprint.
Australia is a good example of a country, where two out of the four refineries close down during 2021 and refined oil products exports for the year average already 13% higher than in 2019, even though oil demand in the country state at 11% below.
The 2019 level at the same time.
Yes.
Please turn to slide 10.
Yes.
Yes.
And just for reference currently use.
Lies.
Presentation that is available on our web site, rather than the presentation going live here and.
And in the presentation on our website, please turn to slide 10.
Positive outlook for demand for product tankers in the next three to five years coincides with the supply side, which is the most supportive for at least the past 25 years.
With record high nuclear 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 biosimilar. The historically low 7% order book to fleet ratio for crude tankers.
Further we've seen searching scrap prices. This is incentivised scrapping of product tankers with the highest level of tonnage removed from the market in 2021 since 2010.
The two drivers support the case of a very modest fee growth over the coming two to three years, which we expect to be around 2% a year, but only half the pace seen in the past five years.
Now to conclude my remarks here on the product tanker market.
We expect volatility on the market now too to the Russian innovation in Ukraine with the potential for ton mile increases to two crude and oil products trade rerouting can.
<unk> improvements in the global fall demand, increasing OPEC supply as well as the need to rebuild depleted crude and product inventories support the tanker market here.
Medium and long term the refinery dislocations the low order book at an extra support for our markets.
Slide 11.
Now looking at our commercial performance.
Once again, Tom has outperformed the peer was in 26 out of the last 28 quarters in our largest segment the loss in here in the fourth quarter of 2021, we achieved rates of $13929 per day.
And again I can only congratulate David.
Everybody on the <unk> platform in our organization.
On board, our ships or in our offices that we continue to deliver these.
Good.
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 TCE earnings. This is driven by our continued focus on the positioning of our fleet in the basins, where we have the highest earning potential and here in the fourth quarter of 2021.
We had control arm, an overweight west of the Suez. While we also saw an outperformance when looking at the full quarter.
Now with that let me hand, it over to you Kim further elaboration here.
Cost structure, the liquidity position and also opens it also.
Very much Jacob.
Please turn to slide 13.
At the end of 2021 we.
We have as Jacob mentioned seen a recovery in Shanghai market with rates, reaching at just below $14000 a day in the fourth quarter for 2021.
And a further increase going into Q1 of 'twenty two.
Where we fixed 85% of our data.
<unk> thousand $569 million.
In the first quarter of 'twenty, one and in 'twenty, one I'm just trying to run 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 $6354 a day.
Compared to $6371 a day in 2019.
We will maintain our focus on cost optimization without jeopardizing quality and customer focus.
Please turn to slide 14.
Early in 2022 ton reached the largest feet ever with 85 business across to maintain the segments. A total of $320 million was invested in new and second hand vessels in 2021, whereas we sold one vessel, which was delivered to the buyer to the buy in 2021.
We recently sold two older vessels.
With expected delivery in the first half of 2022 they.
They were sold at attractive prices.
Our expansion of the fleet was done while maintaining a conservative debt structure and keeping a strong cash position early.
Early in 2022, we ended our new building program by taking delivery of the lots of the two outstanding Isla two scrubber fitted business.
So we are now ready to take advantage of a potential market recovery.
Please turn to slide 15.
As of the.
In 2021, <unk> had available liquidity of $210 million cash totaled 172 million yourselves and we had on top of that the undrawn credit facility of $30 million. The total cash capex commitments related to our new buildings and scrubbers with $48 million.
31 December 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.
Debt maturity profile, we have no major refinancing until 2020 seats, which combined with our strong cash position provides.
So along with financial and strategic flexibility to pursue value enhancing opportunities in the market should they occur.
We do not have any major repayments until 2026.
Further in the fourth quarter of 2021 and in early 2022, we have increased our interest rate hedges to 90% in the coming three years and 85% from three to five years, thereby we are prudently shaking out the potential interest rate risk caused by the increases.
We've seen an inflation levels recently.
Please turn to slide 17.
Regarding metrics, such as net asset value and loan to value.
<unk> of 12 vessels, including new buildings was approximately $1 9 billion by the end of the fourth quarter.
Outstanding gross debt amounted to 114 $8 billion $1 1 billion.
<unk> as of 31 December 2021.
As mentioned, Tom sale leaseback of nine <unk> versus ended up adding $74 million to the outstanding.
Yes.
With limited committed Capex and a solid cash position, we have and it has to be a 52%.
So all in all we have a strong and attractive price the structure, we've recruited both banks and leasing institutions and we have demonstrated our strong access to diversified funding sources in the market and we are very satisfied with our.
The situation.
Net asset value was approximately $1 billion as of 31 December 2021.
And that corresponds to self fund $5 or $2 <unk> per share of Danish kroner for sure.
And I just checked before we started this call.
Tom Sure Im sure you all know it and follow it.
It was at 52 Danish kroner.
Well I'm 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.
Ladies and gentlemen at this time, we will begin the question and answer session.
Anyone who wishes to ask a question or staff up everyone on behalf of Shawn on the phone.
If you wish to remove yourself from the question queue, you May press Star followed.
If you are using speaker equipment today, please lift the handset before making us elections.
One question my.
Hello, everyone at this time.
One moment for the first question please.
And the first question is from the line of Jon Chappell from Evercore. Please go ahead.
Thank you good afternoon.
J J, if I could start with you kind of a two parter on the market.
I want to re ask the.
The question I, probably asked three months ago, which as we lay out such a favorable inventory situations such a favorable supply side demand is recovering opex producing.
Kind of your views on why we've yet to see.
Event less increase.
Substantial increase in the markets and maybe my second part to that is it is noteworthy to me that you called out ran in OPEC.
The Russia, and 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 or even.
At the same time as the product tanker recovery or can one do better without the other.
Okay.
Thanks, John .
Morning, So.
Thank you.
We probably need to like pretense that.
We have a world where the current crisis is not affecting the market then it will fundamentally sitting last Wednesday.
We had a discussion with our board about the low likelihood of a.
The worsening crisis in Ukraine, which within 24 hours after that discussion.
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 onto that the time is that inventories were actually still drawing.
Rather than building and that the OPEC were under delivering 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 the 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.
The product tanker space, leading also to what I've described before around that you actually have headwinds.
A rather unusual situation with the largest ships, earning significantly below in the spot market was <unk> significantly lower than <unk> also because of this cannibalization I believe that fundamentally we need to that situation to change before you will see a real rich.
In product tanker rates that is that as mining now.
Fast forward now one one week later, the warehouse I think dramatically changed because the whole ecosystem.
<unk> crude and also refined oil products is right now on the change because of that.
She bonus.
Oil traders and end users in general are taking a position.
Generally to be very careful or even shying away from trade with Russia, and oil and oil transportation off the same model and that is changing the landscape and as we speak freight rates.
For crude tankers.
Ben.
Going up.
And it is also <unk>.
Spilling into our segments.
And.
The rate environment is today higher than what we have seen since the early part of 2020.
Okay.
And it is also raising the forward curve significantly so, let's say a week ago and <unk> could make probably $5000 per day today, what is being discussed is the rate environment in the low <unk> and if you add the scrubber premium which is clearly going up.
And it's probably around $8000 on an electric today, then you add 30 and it was five so it's a significant step change.
Yes.
True and that scrubber premium you're right.
Something that.
Some good Optionality Super quick one for you Tim I was looking at the debt repayment schedule on slide 16, the 188 kind of stood out to me. So I went back to look at your third quarter presentation and it was only one.
33, so it's up $55 million for this year $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 $33 million as well what was the reason.
For that kind of reset the repayment profile this year.
Chavez always John .
<unk>.
We simply we have the <unk> that we.
On drawn and we tend to just George.
It is basically equal to cash.
Decided to draw so we just catch ethane and we can have is there are we can redeem the rcs once again.
Thats Arena.
Okay, and then just a final one if I can slip one more in.
Two 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 with probably some of the older vessels.
Before.
The rate environment and it takes us.
Yes good.
Good point again.
And we will subscribe to that currently that is.
As the open and that we are pursuing a couple of similar.
Deals.
Like the once we have just done so yes.
Yes.
Definitely high on the agenda.
Okay, great. Thank you Jacob Thanks, Ken.
Thanks have a good day.
The next question is from the line of constant program.
Please go ahead.
Yes, good afternoon, gentlemen, just a little bit back to the market.
Rate levels on anything else.
In actual fixtures, yet or is it just.
Aaron Schacht numbers.
So in the clean that's a good question and as I say, it's it has.
Already.
Proved to be real fixtures, especially in the crude aframax segments and.
There, we are seeing elevated fixtures being completed.
Of course also in the largest segment into us and but so far.
This is what is driving up also the yellow to rates.
That has been quoted but it is within the last 24 to 48 hours. So it's it's.
Its pretty new let's see where it settles.
There is a strong push on rates being quoted right now, but nothing concluded.
Okay.
<unk>.
Interesting.
In terms of.
Now this is.
Bye.
All things changes.
At the moment.
The Russian.
Diesel volumes to Europe .
Is there sufficient capacity.
And in other regions to fully replace that.
From a quick notes are.
It wouldn't be the time back to institutional.
Okay. So that is a very good question that we also obviously looking into because further refined Russia the impact on Russian oil is a crude and then be diesel.
And we would say that Russia would need to find new markets for the products that they are currently exploring into Europe , and let's say.
The countries that are current and shying away. So if I take it an assembler manner. If we started with crude clearly today the biggest buyer of crude from Russia. One of the thing is China and you could expect what we're seeing is the China.
Is publicly.
<unk> that they will not.
Put sanctions on Russia. They have also.
Some of the Russian control tonnage.
On period charters for unit pick clearly signaling that they will continue as the trade flow on crude between Russia, and China and I think that there is.
Whereas the high likelihood that it will increase from what it was a week ago and Theres 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 parts of it.
So to West Africa, and that would sort of.
To 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 with Africa, but they will be incentivized to sell into Europe .
To have a redistribution with longer ton mile off the same volumes that's our main.
That's how we think that it could play out.
Yes.
Honestly that Russian refineries are no longer producing I don't think that is that that seems to be some where 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 participants will be to continue the flu.
Okay.
Yes.
I think.
It's along the lines thinking lifestyles.
Yeah.
One last question.
It's rich.
Refinery shutdowns.
Youre, an uplifting in refinery shutdowns in China, but my understanding is that some of the new refiners may replace the old ones.
And Thats inbound thinking or do you think it's just going to be.
All refiners are going to continue.
Steady today.
Yes, good point, so the way we have described in rather than having the grass.
<unk>.
And the cross closer we have netted out in the description that we have on this slide. So you will see there that we have said that the refinery addition for the year 2012 centers three in China is about 1 million barrel per.
And that is net so there you have more additions, but you also have closures. So that's a net addition.
Okay. Thank you that's all for me.
Thank you very much.
Good questions.
Let's see what evidence.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by one on your telephone.
The next question is from the line of <unk> Mohmand from value investors. Please go ahead.
Good morning, you conducted several acquisitions during 2021.
Could you provide some commentary on your appetite to continue expanding the fleet are you seeing any attractive opportunities.
Yes, so we are constantly obviously.
Following the opportunities there is in the market.
Let's see is a very volatile market that we have entered into.
So time will tell but we are always open for the type of opportunities that we saw last year. So one as you point to we did a transaction.
Transaction to acquire chemical tankers from incorporating the team tankers and B, we did enter into an agreement to buy.
Not new but relatively new tonnage in the two segments. 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.
Alright makes sense.
The environment is there a bit.
The positive impact vehicle component in scrubbers relative performance.
What kind of premium are you able to skew in your modern assets versus the older ones.
Regarding Q1 guidance could you, perhaps quantify the positive effect of scrubbers.
Yes.
Yes so.
Eight.
On the modern versus old actually we have all tonnage.
<unk>.
Our fleet that have scrubber.
The economics is the same as a modern vessel so.
Im not really seeing a discrepancy.
In terms of.
This with Asia, it's more of the characteristics around cubic and other things.
Relative to whether it is.
Young old that is dictating the earning potential now on the on the scrubber currently.
As I mentioned, the scrubber premium right now in Singapore.
The spread is close to $300.
On between high sulfur and low sulfur.
Yes.
Only at the very beginning of the islands 2020 implementation bagging early part of 2020 that we have seen this and if you. If you use that as your calculation then we estimate that ela tools.
Currently right now in that area of the world, having benefit of around 7% to $8000 and hilla, one 5% to six and <unk> $3 $4000 higher earning potential but this is very lately that we have seen is only over the past week has the label Con.
Answer that.
Alright Thats helpful.
Final question from me you have our dividend policy of distributing 25% of net income as dividends, but its yield nine Tommy trading.
Substantial discounting Edison value.
Our share repurchases something you would consider in the current environment.
No.
We are not contemplating a share repurchases at the world.
Right now that has not been part of our discussions internally.
Alright, that's all from me thank.
Thank you for taking my questions.
Thank you very much that liquidity.
There are no further questions at this time I would like to hand back to Andrew asked about that time for closing comments.
Thank you.
One more question on the webcast.
From from Danske Bank.
Sure.
As for you can you comment on the sales price of the two vessels you have sold and the net cash effect.
The.
The two divestments, we have made as part of our ordinary replenishment.
Focus so its older vessels one.
Randy.
One of them.
The science that we have divested.
We do not.
Usually comment on the precise price that we have chosen for.
Our referenced fund is of course the.
The reason the values multiples of the vessels and we are very satisfied.
Regarding proceeds net proceeds.
Net liquidity additions.
Okay.
Closed.
It's in the level of 13 5 million U S dollars.
Thank you Dave.
There are no further questions. So this concludes the earnings conference call for the fourth quarter 2021 results tons annual report will be released on 20 <unk> of March 2022, Thank you for participating.
Ladies and gentlemen, the conference is now concluded you may disconnect the telephone.
Thank you for joining and have a pleasant day goodbye.
Yes.
Okay.
Sure.
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Yes.
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Okay.
Thanks.
Okay.
Yes.
Yes.
Thanks.