TORM plc Q1 2023 Earnings Call
Speaker 1: The.
Speaker 2: everyone to the Torm PLC first quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star then the number one on your telephone keypad.
Speaker 2: You can also ask your question on the webcast. I would now like to turn the conference over to Andreas Ablegadheim, Head of Investor Relations. Please go ahead.
Speaker 3: Thank you and welcome to the conference call. We are pleased to have you with us and we have been looking forward to presenting to you the results for the first quarter of 2023. We will refer to the page numbers that we present during our presentation and at the end you can ask questions if you are on the phone conference. If you are joining via webcast you have access to ask questions during the presentation as well. After this conference you will be able to listen to a recording and as usual you can find our presentation and other resident data on our website.
Speaker 3: Please turn to slide two.
Speaker 3: Before we start presenting the results, I would like to draw your attention to the safe offer statement.
Speaker 3: Please turn to slide 3.
Speaker 3: Today's presenters are as usual Executive Director and CEO Jacob Elgar and CFO Kim Bell.
Speaker 3: Please turn just like 4. I will now hand over to get up.
Speaker 3: Thank you Andreas and good afternoon, good morning to all. Thanks for connecting with us today for our first quarter 2023 results presentation.
Speaker 3: During the first quarter of 2023, the product hanger market has remained strong with continued high volatility.
Speaker 3: We have achieved an EBITDA of $199 million and a profit before tax of $155 million, both of which are reduced by $15 million due to unrealized losses on FFA contracts.
Speaker 3: that we have incurred to secure strong earnings on part of our earnings days here in 2023 and into early 2024.
Speaker 3: Return on investor capital ended at 29.2% for the quarter and our balance sheet remains strong at netLTV of 26% and available liquidity of $575 million USD.
Speaker 3: This morning, the Tom's sport of the record has approved a dividend of $1.46 US dollars to share based on the first quarter, and we expect that we'll distribute around $121 US dollars here in the region.
Speaker 3: As of today, we have taken delivery of all of the 7LR1 vessels that we acquired a little earlier this year back in January . We expect that the 3 MRR vessels that we announced to be acquired here in March will be delivered to us by the end of this month.
Speaker 3: As of the 5th of May, we have covered 64% of the second quarter tonnage days at $40,086 US dollars per day. Please turn to slide 5.
Speaker 3: invasion of Ukraine.
Speaker 3: Now, back in February 2022, we've seen strong improvements in product tanker rates. Increased trade flows, longer trade distances, mainly due to the EU sanctions on Russia. But partly, also due to more fundamental factors, such as the oil demand recovery.
Speaker 3: increased import needs. This has moved the product tanker fleet closer to the point of full utilization, which again has led to higher freight rates, and this is where even small changes in the underlying demand and supply are creating high volatility in freight rates. And this is what we have experienced in the past.
Speaker 4: Yeah.
Speaker 5: Please turn to slide 6.
Speaker 3: This rate volatility can be demonstrated by movements in the average rate rates. But in the past months, we have also seen increased rate volatility across different regions, which has in turn led to even more MR vessels.
Speaker 3: balancing over longer distances to optimize their earnings.
Speaker 3: These more inefficient selling patterns have tightened the availability of vessels on the market and further supported freight rates.
Speaker 3: able to then process our fleet towards the premium trades and the regions is even more important. And this means that having access to the right customers, the right target combinations is really essential. And so.
Speaker 3: customers and we remain confident that we will have access to the cargos and the trades that will enable us to position our fleet towards the premium regions.
Speaker 3: More closely as the main market drivers, the geopolitical conflict in Europe and the resulting EU pan on Russian oil products has been the most important demand driver for more than a year now.
Speaker 3: As a result, the composition of EU imports has undergone a significant change from being mainly short-haul to being now predominantly long-haul.
Speaker 3: This has translated into a 48% increase in EU import 1 mile during the post-Sanction period compared to the same period a year ago.
Speaker 3: And this is in spite of the fact that EU imports are almost 20% lower year and year, which itself has been a result of higher imports and part of stockpiling ahead of the sanctions.
Speaker 3: as well as the fact that EU Ultimate has seen some weakness so far this year.
Speaker 3: Similarly, Russia has so far been successful in redirecting its clean products to markets in North and West Africa.
Speaker 3: increasing turn miles although recently we have seen some slowdown in Russian volumes presumably due to refinery maintenance.
Speaker 3: Looking at some of the more fundamental drivers, so not related to cube politics, changes in refinery landscape are also an important driver on the market.
Speaker 3: Since 2020, around 3 million barrels per day of refining capacity has been closed down permanently.
Speaker 3: Most of the affected capacity is located in regions which are already large importers of refined oil products such as Australia, New Zealand, South Africa, just to mention some of the examples.
Speaker 5: This region's import needs have increased.
Speaker 5: up with especially jet fuel demand still recovering.
Speaker 5: in the Middle East and also in China. The companies that are already today are large exporters of all products.
Speaker 5: their full capacity. These refineries are, to a large extent, concentrated around middle distillates, which we believe will further facilitate the trace recalibration triggered by the EU ban on toxinol.
Speaker 5: significant increase in exports from China. But should China increase its export quotas in the coming months, this would be another leg up on the market.
Speaker 5: product hangers in the next two to three years coincides with the supply side, which remains supported despite we've seen recent increase in new building ordering.
Speaker 5: Indeed, recent orders, especially in the LR2 segment, have resulted in the order book to feed ratio increasing to 8% from 6% just two months ago. But our feed growth assumptions for the coming two to three years have not changed as these new orders are mostly for the second half.
Speaker 5: of 2025 or 2026.
Speaker 5: And we expect some of the late 2025 deliveries to be pushed into 2026.
Speaker 4: Please turn to slide 10.
Speaker 5: Please turn to slide 10. When we look at the fleet supplier,
Speaker 5: over a longer time horizon. It is possible that there will be more availability for product tank orders at shipyards.
Speaker 5: And subsequently, we could see higher deliveries of new bills.
Speaker 5: not least, due to the need to renew the aging fleet. However, this will coincide with a significant increase in the scrapping potential as the fleet built in the 2000s is reaching their natural scrapping age.
Speaker 5: Consequently, the net free growth could even serve negative here in the second half of this decade.
Speaker 4: Please turn to slide 11.
Speaker 5: Another aspect that one needs to take into account in connection with the recent pickup in the LR2 ordering is that given the versatility of the LR2 fleet, they can both trade clean and dirty products. The LR2 order book is a
Speaker 5: should be seen in connection with the AFERMAX order book, which of course relates to dirty products.
Speaker 5: The combined order curve is currently at 9%, still relatively low in historical terms, and this compares with 5% of the combined fleet reaching 25 years of age during the same period.
Speaker 5: And we consider that this segment has normally a lower average scrapping age, which has historically been 21 years, till regularly even all the way up to 24% of the fleet could be removed from the primary market in the next 3 and a half years.
Speaker 5: data that this segment has normally a lower average scrapping age which has historically been 21 years. Till regularly even all the way up to 24% of the fleet could be removed from a primary market in the next three and a half years. Now
Speaker 5: Here, kindly turn to slide 12. On the concluding remarks here on the parts and the market, it's clear that we see the main demand and supply drivers on the parts and the market continue to be very supportive.
Speaker 5: The trace recalibration changes in the refinery landscape, which already started last year, will continue to support the market also this year, with the new large refineries ramping up in the Middle East being an important driver in this development.
Speaker 5: Around a year ago, we estimated that the full recalibration of the EU-Russia trade would add 7% to the tonne-modelment for product-engres.
Speaker 5: And according to our calculations, 6% of this has already happened, despite the fact that EU imports have been down so far this year. With an expected pickup in European imports later this year, the ton-miles could increase by a further 2-3% and in fact exceed our original estimates.
Speaker 5: Of course we should not disregard the fact that the current environment with high inflationary pressure on the global economy.
Speaker 5: could slow down the growth pace of the global ultimate. the ones we've met, never left
Speaker 5: We believe that even those effects will be overweight by the effects of the redistribution of the energy supply chain. And that a potential effect caused by slower demand growth will not trump the redistribution.
Speaker 5: Furthermore, the positive demand side is complemented, as I mentioned, by this port of supply side situation, securing low fuel for at least the next two to three years. I'll pause and I'll now hand it over to my colleague, Kim.
Speaker 5: positive demand side is complemented, as I mentioned, by this port of supply side situation, securing low fee growth for at least the next two, three years. I'll pause, and I'll now hand it over to my colleague, Kim. Thank you, Jacob.
Speaker 3: Please turn to slide 13. Despite the strong TCE rates achieved on average in 2022, we have achieved even higher TCE rates in the first quarter of 2023.
Speaker 5: We increased our rate from $34,154 per day in 2022 to above $41,700 per day.
Speaker 5: robot solar 6,732 early days in the first core across the fleet
Speaker 5: Based on our rates and coverage for SR5 May 2023, we have fixed it over 64% of our days at $40,086 per day in the second quarter across the fleet. For MR, 68% were fixed at $35,804 per day. For MR, 62% were fixed at $45,578 per day for ELAT once. And 51% were fixed at $59,197 per day for ELAT use.
Speaker 5: Part of the coverage has been made with FFA contracts and as per 5th May 2023 the cover for the second quarter of 2023 was 744 days fixed at $42,026 per day. For the third quarter 1,116 days were fixed at $42,199 per day. And for the fourth quarter 1,116 days were fixed at $42,402 per day.
Speaker 5: of sorry $42,405 per day and as per first quarter of 2024, 443 days were fixed at $41,849 per day.
Speaker 5: Similarly, the results are fixed at strong levels for the second quarter where we are expecting 7,546 earning days and in Q3 when all additional secondhand vessels will have been delivered we expect 7,761 earning days. Tom had 299 dry targeting days in Q1 2023 which is 29% of the expected dry targeting days for the full year.
Speaker 5: The continuous strong markets have provided us with an EVDA of $199 million from our operations in the first quarter of 2023 and over the past four quarters we have achieved an EVDA of $881 million. During the same period, Tom has paid dividends of totally $511 million to our shareholders together with the dividend announced earlier today. At the same time, while acquiring 10 secondhand investors to the feet, we have reduced our net loans of value to 26% before dividends by the end of 2021-2023. Our K-based commitments increased during the first quarter of 2023 and the increase is driven mainly by purchase but not yet delivered basis and score-away investments.
Speaker 5: Please transfer slide 15. Tom continues to evaluate our opportunities for fee expansion and renewal. As mentioned, we acquired the tool of sensing and measures in the first quarter of this year.
Speaker 5: This means that as of 31st March 2023 the value of the 83 vessels that we have on a fully delivered basis in our fleet at that time reached 2.9 billion dollars.
Speaker 5: An increase of $136 million USD since the same time in 2022.
Speaker 5: Existing measures increased by 3% since the end of 2022.
Speaker 5: And we added five vessels to the feed amounting to 172 million dollars.
Speaker 5: Since the end of the quarter further two vessels have been delivered and further three vessels will be delivered before the end of May, corresponding to 166.99 million dollars in value.
Speaker 5: Our net asset value reached $2.6 billion as of 31st March 2023, also impacted by significant cash generation. By the end of the 2nd quarter 2023, we expect to have 88 bettors in our field.
Speaker 5: Furthermore, we have seen that the secondhand vessels for especially ELLA1s and 10-15 year old MS have increased further since the end of Q1 2023.
Speaker 5: Please turn to slide 16. As mentioned we will distribute around 121 million dollars or 1.46 dollars per share based on our end of first quarter cash balance. Consistent with our distribution policy or distribution.
Speaker 5: is derived from our cash precision of $111 billion and our available funding sources of $115 billion. We deduct restricted cash primarily related to FFA, so $30 billion.
Speaker 5: and cash in marine and source technologies of around $5 million. And finally, the amount of fees which were part of use for the 5.01 basis of $23 million.
Speaker 5: The minimum cash reserve for 83 visits was $149 million at the end of the first call.
Speaker 5: Our payout ratio remains high at a level of 78% of the profit before tax of $155 million.
Speaker 5: Please join to slide 17. During the past months Tom has utilized the strong wires to strengthen our financial position.
Speaker 5: Comparing to our first quarter performance last year, our net loan to value has reduced significantly from 51% to 26%.
Speaker 5: In addition, we have obtained refinancing and acquisition commitment of $556 million while extending debt maturity from 2026 to 2028 with a further possibility to extend to 2029.
Speaker 5: The commitment further secures an interest rate margin reduction of $433 million of Tom's existing debt. Margin reduction is an all in 65 basis points. This includes the loan margin reduction and the new loan applied software as an interest rate.
Speaker 5: which is lower than the US LIFO. The refinancing underlines the strong precision we have with European shipping banks in addition to the strong relationship that we have with Asian lending houses. All in all a conservative funding structure coming.
Speaker 5: from wealth-adversing funding sources.
Speaker 5: respectively. Our five-year interest rate exposure was hit at 1.47 plus margin either by interface swaps or by fixed rate agreements.
Speaker 5: in the first quarter 2022 to 574.6 million US dollars in the first quarter of 2023, including funding commitments related to acquisition of the remaining two LR1 significant businesses. Our distribution policy, where we hold back 1.8 million dollars per vessel, provides a strong liquidity buffer. Further, with the coverage already obtained, we have fixed 31% of our earnings.
Speaker 2: our first question will come from the line of John Chappell with Evercore. Please go ahead.
Speaker 6: Thank you. Good morning or good afternoon. Jacob, I want to start with a market one, just a little bit of clarification but also a little bit of recency. I thought it was interesting that you said the 7% of ton-mile benefit that you foresaw, let's call it 12 to 15 months ago from what's going on in Europe .
Speaker 6: You have 6% of that already, but then you'd also laid out another 3% from kind of refinery dislocation, etc. So when we put it all together, you know, the 10%
Speaker 6: I guess aggregate ton-mile benefit you think you're already 60% of the way there. Is that an accurate assessment if we had it all together and then you know the second part of that is given some of the recent volatility maybe to the downside can you explain some of maybe the seasonality or some of the other issues that you think have caused a little bit of downward volatility of late.
Speaker 3: Yes, absolutely. So the way we think about this, that clearly the sanctions are working the way that they intend to. So oil is flowing.
Speaker 3: as crude out of Russia and you're seeing that Europe is replenishing on the refined product side with products from further away.
Speaker 3: What we have not seen so far is that the volumes that we are experiencing are lower than what they were on average last year at this stage because there has been some stockpiling taking place towards the end of last year. So the differentiator here is that actually the rate recalibration, we say it's 6%
Speaker 3: so far, but there's more to come and that more to come stems from a normalization in the import levels.
Speaker 3: So that is what it is a volume game that is a little different. So actually the fact that we calculated 7% that was based on those volumes. We are not seeing exactly 7% yet only 6 because of volumes being down, but transportation distances being slightly higher.
Speaker 3: So we think it's accurate, but it's of course hinging on that you would see that imports into EU would grow from where they are now.
Speaker 3: So that's number one. Number two to some of the recent weakness which is primarily seen from our perspective actually a European MR or Atlantic MR game. Much of that has to do with what we don't have so much insight into.
Speaker 3: which is the Russian refinery sector being closed down for maintenance. I think that is the one key component into understanding the seasonality of the rate environment for MS in the Atlantic that currently...
Speaker 3: some of the vessels that would be engaged in export out of Russian refiners, they are now reentering, so to say, the market that we've been operating in and many of our peers all along, which is non-Russian trades. Our opinion is that Russia will not necessarily come back to Russia.
Speaker 3: exactly where they were on their export spot close to and at that point that will take tonnage.
Speaker 4: up and the efficiency in our market will in that sense go down, leading to a higher freight rate environment.
Speaker 4: I'm not seeing big signs of change currently in the eight years. It is of course on a day to day it's quite sensitive but
Speaker 4: I don't think that's a good indicator of what is taking place. We saw that MR rates, for instance in the 80s were, let's say in the low to mid-20s yesterday and today they're in the low to mid-30s. But is that a sign of that there's any dramatic change in the underlying freight? Not really. It's just that there's a little more cargo's coming in the market and then immediately the return rate will be somewhat down from the high side and clicking that back arrow
Speaker 4: rate rates react. And I think we will see a lot of that that intraday, almost intraday or at least intraweek rates will be quite volatile.
Speaker 6: That's a very good perspective. My second question is, how long does it take to get to the end of the day?
Speaker 6: I think that the strategy has been very clear over the last couple of years or so. You've been selling quite well, you've been adding to the fleet.
Speaker 6: getting good returns on new tonnage, the refinancing of the balance sheet, the dividend policy. There's a little confusion this morning, I think, around your numbers because of that FFA exposure. I'm just wondering why. There's 88 chips, you have a lot of exposure to the market already. Why are you getting involved in FFAs?
Speaker 4: to hedge the forward clip when we see that there is value in it. So what we did was that we took the rolling 12 months, I think on LR1s it was around 45, on MRs around 40. And we used the FFA as an instrument to hedge part of it.
Speaker 4: Now on an intraday basis again, the maximum amount of that could be lower, it could be higher. Now on the day of issuance, it's $15 million unrealized loss. If we did it again today, it's positive around $20 million positive. So that's a swing of that we have on paper created $35 million, but we don't look at it that way. This is just...
Speaker 4: It's actually a head instrument, but it's being marked to mark in our accounting.
Speaker 4: We will continue to utilize this way when we see there is value, but I cannot avoid that there will be a, on the day that we are reporting, we will have these mark-to-market event soon.
Speaker 4: And we are very cool around that, to be honest. We think we're doing the right thing. Okay. That's very helpful. Thanks for all the perspective, Jacob.
Speaker 2: And as a reminder, if you'd like to ask a question on the phone line, simply press star followed by the number one on your telephone keypad. You can also register for a question online. We'll pause for just a moment to compile the Q&A roster.
Speaker 2: And we have no further audio questions at this time. Andres, I'll hand the call back to you.
Speaker 3: Thank you. We have no further questions now. So this concludes the earnings conference call regarding the results for the first quarter of 2023. Thank you for participating.
Speaker 2: Ladies and gentlemen, that does conclude today's meeting. Thank you all for joining. You may now disconnect. Thanks for watching tomorrow's video and please subscribe to our Province, titled,
Speaker 1: I F.