Q3 2024 TORM PLC Earnings Call
Thank you.
Audra: Hello, my name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the TORM third quarter 2024 results conference call. Today's conference is being recorded.
Audra: 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 the star key, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker Change: At this time, I would like to turn the conference over to Jacob Meldgaard, Chief Executive Officer. Please go ahead.
Jacob Meldgaard: Thank you and a warm welcome to everyone joining us on the call today. This morning we released our third quarter results and I'm pleased to share that TORM has once again delivered a strong financial performance.
Audra: Let me start by highlighting some of the key takeaways for the quarter.
Audra: Our time charter equivalent earnings rose to US$263 million and EBITDA amounted to US$191 million, although trade rates have been lower than expected in the last part of the quarter.
Audra: We continue to see the market dynamics we've experienced in recent quarters, driven by ongoing geopolitical tensions from both the Ukraine-Russia conflict and escalating issues in the Middle East.
Audra: These factors have resulted in vessel rerouting, longer voyages and higher ton mile demand, contributing to a tight supply-demand balance in the product and car market.
Audra: However, in the quarter we have also seen that a significant part of the increased CPP volumes has been carried on uncoded VFCCs and SUISMAXes, and this has shifted the balance and put a temporary cap on rates.
Audra: Looking ahead, we believe the key fundamentals supporting a positive rate environment will remain in place, although we recognize that the market is very susceptible to changes in both the geopolitical scenario and potential cannibalization from crude carriers.
Audra: As mentioned by us here back in August, we've acquired eight second-hand MR vessels for US$340 million in a partly share-based transaction.
Audra: These vessels built at Hyundai Mipo dockyard between 2014 and 2015 are part of our ongoing program to replenish our fleet and so far we've taken delivery of six of the vessels and are expected to take over the remaining two before the end of the year.
Audra: With this strategy, we believe TORM is set to continue to create significant value for our shareholders also in the years ahead.
Audra: It's been a profitable quarter and in line with our policy of distributing excess cash flow after debt repayment, TORM had declared a dividend of USD 1.20.
Audra: Per share, for the quarter, adding to the strong dividend flow seen in recent periods.
Now, please turn to slide four.
Audra: Now, for almost three years, geopolitical tensions, first in Europe and since then in the Middle East, have driven product tanker rates to a new, higher average level. At the same time, we've also seen increased volatility in rates, as seed utilization has moved closer to full utilization.
Audra: However, in recent months, we've seen a decline in rates as short-term factors such as intensified crude tanker cannibalization have softened the positive impact from geopolitical factors.
Audra: And here kindly, turn to the next slide, turn to slide 5.
Audra: If we start with a bigger picture, the main impact of the geopolitical tension has been a reshaped product-tanker trade towards longer distances.
Audra: The sanctions against Russia in 2023 led to a trade rerouting towards longer-haul trade, both for European imports but also for Russian exports.
Audra: This year, the product thinker market has been strongly affected by the Fuji attacks against commercial vessels at the Bab el-Mande Strait.
Audra: The share of global clean petroleum product trade transiting the Suez Canal has declined from 12% to only 4%, with most of the redirected trade going a longer route around the Cape of Good Hope.
Please turn to slide 6.
Audra: If we look closer at seaborne trade with clean petroleum products, trade volumes have increased by 2% so far this year, supported by increasing global oil demand and recent changes in the refinery landscape.
Audra: Together, with longer trading distances, this has led to an overall 10% increase in total mile demand.
Action Loaded Volumes
Audra: have though been trending down over recent months and fell to below a year ago levels here in October.
Audra: One of the regions affected has been the Middle East, where exports have fallen by 8% month-on-month in October.
Audra: Given the region's market share of around 10% of the global CPP exports and the fact that the Middle East exports to the West is one of the trades most affected by the Red Sea disruption, this of course has had a strong impact on our market.
Audra: Nevertheless, we've started to see improvements in refinery margins in some regions that should support high refinery runs and demand for transportation.
Audra: A lot of talk on the oil market in recent months has been about China's disappointing growth in oil consumption.
Audra: While the effect of the recent government stimulus package has yet to show in oil demand, it is also important to point out that for the product tanker market, China's market share is below 5%.
Audra: However, China is important for us indirectly, as China accounts for around 25% of global crude oil flows, and hence has an impact on the crude tech market.
Please turn to slide 7.
Audra: The unusually large spread between product and crew tanker earnings that we saw earlier this year led to a clean-up of our number of VLTCs and SUVs maxes since the end of the second quarter.
Audra: These accounted for 9-10% of the clean petroleum product tonnemile here in the third quarter, offsetting a large part of the incremental tonnemiles.
Audra: This is already seen in both the volume of crude oil trade in the first month of the fourth quarter, but also in the stark decline in the volume of clean products being loaded on food tankers.
Audra: While CPP trade volumes are yet to increase after refinery maintenance season and run costs, the headwinds from crude cannibalization have reduced so far in the fourth quarter.
Please turn to slide 8.
Audra: On the tonnage supply side, we've seen an increase in new building activity this year with the order group currently standing at 22% of the fleet.
Audra: As we pointed out earlier, new building activity has largely concentrated around the LR2 segment.
Audra: Given the versatility of the LR2 feed which can trade both clean and dirty products, the LR2 order book should be seen in connection with the dirty AFROMAX order book.
Audra: The combined order book is currently at 18%, which is more or less equal to the share of combined fleet being candidates for scrapping.
Audra: A similar trend is seen in the entire product cycle fleet.
Audra: In fact, the average age of the peat has not been as high as it is today in two decades.
Audra: With 14% of the fleet about 20 years old, this will potentially offset a large part of the fleet growth in the coming years.
Audra: Should a strong freight market result in less than expected scrapping activity, as we've seen in the past two years, we still expect older vessels to leave the mainstream market and go into sanctioned or capitalized trades.
Audra: Furthermore, we see that as vessels turn towards 20 years of age, their average utilization drops significantly compared to younger vessels.
Audra: That would lead to a growing share of the fleet operating at a lower utilization.
Audra: Now, please turn to the next slide, please turn to slide 9.
Audra: Looking further ahead in time, we expect the product tankers delivery from 2028 onwards to be much lower than what we are going to see for the next three years.
Audra: This is predominantly due to Chinese shipyards opting to build container vessels, LNG carriers, and other vessel segments where China has strategic import interests.
Please turn to slide 10.
And on this slide, lastly, I'll...
say that behind the geopolitical factors
Audra: that have reshaped refined product trade. There is a refining industry influx.
Audra: In recent years, new refining capacity has been added in net exporting regions such as the Middle East. On the other hand, a number of refineries have been closed in net importing regions, for instance, Europe and Australia. This has led to higher trade volumes and higher demand for product anchors.
Audra: Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling refinery utilization rates in mature demand regions raises the likelihood of further capacity closures before the end of the decade.
Audra: Here, especially Europe, stands out with older, relatively small and less complex refiners that are more open to international trade than in other regions.
Audra: A new wave of refinery closures is likely to again increase trade with refined products.
Audra: And just a final note on the market, we believe that Trump's presidency is likely to imply less restrictions on the U.S. oil industry.
Audra: and with potentially stricter sanctions against Iran, that would be a supported factor for the crude sector market.
Audra: It remains obviously to be seen, but we expect U.S. oil imports to be shielded from potential tariffs in order to keep gasoline prices under control.
Audra: On the geopolitical landscape, Trump is likely to push for a faster resolution of the Ukraine-Russia war. However, the prospects for success for Trump in negotiating a settlement remain uncertain.
Audra: What matters most for the tanker market is the EU sanctions and we do not foresee a quick abolishment of these or a full return to pre-war oil trade between the EU countries and Russia.
Audra: However, with Trump's more aggressive approach to geopolitics and trade policy.
Speaker Change: Now, with these comments I conclude my part of the presentation. I'll hand it over to my colleague Kim, who will walk us through the financials.
Kim: Thank you Jacob. Now please turn to slide 11 for the financial highlights.
Kim: In the third quarter, TCE amounted to US$263 million, and based on this, we achieved US$191 million in EBDA and US$131 million in net profit, i.e. slightly up compared to same quarter last year.
Audra: Fleet-wide, our average TCE rates were close to US$34,000 per day, while LR2s pulled in close to US$41,000, LR1s at over US$33,000 and MRs at more than US$31,000.
Audra: While rates were strong early in the quarter, they softened significantly in September due to seasonal factors as well as crew tankers taking some of the additional tonne-mile demand.
Audra: Overall, we had 8,253 earning days this quarter, up from 7,949 days last year.
with LR2s making up a larger share of the total.
Audra: We are proud of these results, which reflect a TCE rate per day increase of US$700 compared to Q3 2023.
Audra: Moreover, our return on invested capital amounted to 20.3%, demonstrated a very positive
Healthy business environment in the third quarter.
Audra: Once again, our business is developing substantially profit and cash flow and we are committed to continue our practice of returning a significant portion of these earnings to our shareholders.
Now please turn to slide 12.
Audra: The chart in the upper left corner shows how vessel values have steadily risen over recent quarters, bringing the total value of up to US$3.9 billion. The growth in net asset value mirrors broker valuations of our vessels as well as the expansion of our fleet.
Audra: On the lower left, we've highlighted the trend in our net interest bearing debt, which now stands at US$825 million, i.e. flat relative to the same quarter last year, despite the feed expansion that we've made.
Audra: Right now, our net loan-to-value ratio is at 23.1, i.e. lower than the same quarter last year.
Audra: And after subtracting the declared dividend for Q3, it will move closer to 26%, maintaining a solid financial foundation as we move forward.
And now please turn to slide 13.
Audra: Based on the result in this quarter, the Board of Directors have declared a Q3 2024 dividend of $1.2 per share.
Audra: This slide gives you the full overview of the dividend distribution and the key days to observe. Ex-dividend date for the shares on Nasdaq Copenhagen will be on the 20th of November and for the shares on Nasdaq New York on the 21st of November, as shares are now trading T plus one in New York, but otherwise the same procedure as usual.
And now please turn to slide 14 for the output.
Audra: Based on the results we have published today and the coverage we have for the fourth quarter of 2024, we have close to full visibility for the year.
Audra: The table shows that we in the fourth quarter of 2024 expect to have 8086 earning days and as of 4th November 2024, we have fixed a total of 52% of those at a feed-wide rate of US dollars 29,044 per day.
Audra: compared to the current spot race is reflex, so this is relatively high, thus you, if you assume that TORON will achieve rates in line with the current spot race for the remaining part of the quarter, then the feed rate, feed right rate will be affected accordingly.
Audra: Thus, for the full year, we are now at 87% coverage at a feed-wide rate of $38,379 per day.
Audra: This compares to 2023 fleet-wide rates of US$37,124 per day, i.e. underscoring what looks like to be an overall very satisfactory year with average rates for each segment close to last year's levels.
Audra: As you may recall, three months ago we narrowed our guidance range by increasing the low end of the guidance range. This time we primarily bring down the high end of the range, thereby taking into account the current spot rate environment.
Audra: Thus, we expect TCE earnings for 2024 of U.S. dollars $1.11 billion to $1.16 billion and EBITDA of U.S. dollars $810 million to $860 million.
Audra: We continue to maintain a strong cash position, which provides us with significant financial flexibility and enables us to seize opportunities in the markets should they arise.
Audra: Our debt maturity profile remains secure, creating long-term financial stability that is essential, as it allows us to focus on executing our strategies without concerns of any major debt refinancing.
Audra: It also provides comfort to our investors knowing that our financial obligations are well managed and spread out over a period of time.
Audra: We have no major capex commitments at the moment, and this enables us to be more agile and responsive to market conditions, focusing on investments that generate higher returns.
Audra: We have successfully enhanced our operational leverage, allowing us to capitalize on femoral market dynamics in the previous course.
Audra: Leveraging these dynamics allow us to optimize performance and stay competitive.
Audra: We continue to take a prudent approach to financial leverage by using share-based funding for our recent vessel acquisitions.
Audra: This ensures that our net loan to value ratio remains unaffected, which is important for maintaining our strong financial health.
Audra: By structuring these deals in this way, we have expanded our fleet without increasing our financial leverage, keeping our balance sheet strong.
Audra: And finally, we remain firmly committed to delivering value to our shareholders.
Audra: Consistent with our strategy, we are distributing 100% of free cash after debt repayments on a quarterly basis. This ensures that our shareholders continue to benefit from our financial performance, reinforcing trust and confidence in our long-term business model.
Speaker Change: With this, it concludes my part of the presentation and I will hand it back to the operator who will take care of the Q&A session. Thank you.
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
We'll take our first question from Emily Harkins at Jeffreys.
Speaker Change: Hi, this is Emily Ahn for OMAR. Thank you for taking our questions. I'd first like to ask, how are you thinking about the product market thus far into 4Q, the cannibalization by the VLC seeds and Suez Maxis impacted product anchor demand in 3Q, but those ships are now going back to their normal trades. However, product rates have fallen. So what do you make of that?
Speaker Change: Yeah, good morning, and really thanks for bringing up that. So I think we tried to illustrate also in the prepared remarks that we think that Q3 was affected by crude cannibalization and that is more or less so far at least a Q3 story. So we are seeing that here in the fourth quarter, there is no
Ola and above.
Audra: utilization of crew tankers in the CPP trade from what we would normally experience. So there's a normalization taking place. So why have rates not reacted well? At least as I mentioned.
Audra: One factor to look at is that the absolute volumes out of the largest market
Audra: and Andreas Abildgaard, Kim Balle, Unknown Executive, Mikael Larsen, Kim Balle, Unknown
Audra: from cannibalization from the coot carriers, that is not so much longer the case, however, when you then prolong sort of the softness in the rate environment, by the fact that we have lower volumes to transport. So one,
One softening of rates.
Audra: could be seen as a factor of supply, whereas the current softness in rates, we would attribute more to the demand having been lowered due to refinery outages and refinery maintenance.
Speaker Change: Thank you so much. And as a follow-up, you tended to be active with fleet renewal on an ongoing basis, including the AMRs that you mentioned that you acquired this past summer. Do you have your eyes set on more transactions or do you prefer to take a wait and save approach given the softer market now?
I think
Speaker Change: it's clear that the buyers and sellers in a market where we're sort of re-establishing
that we need to see a new...
Unknown Executive, Mikael Larsen, Unknown Executive, Mikael Larsen, Unknown Executive,
Unknown Executive, Mikael Larsen
Thank you so much. I'll turn it over.
Thanks.
Thank you for joining us.
Speaker Change: We'll go next to Van Dyck Fulden-Nijmegen at Clarkson Securities AS.
Speaker Change: Thank you. Just building on the previous question here, you've previously been...
Successful at use like in your
Speaker Change: I would say, with the product time to space trading down recently, how are you thinking about sort of this strategy going forward?
Speaker Change: Thanks for that and to be very clear, we don't see that as a very potent tool.
Speaker Change: In the toolbox, given the current discrepancy between the public market pricing and our NAD, so to your point,
If the snapshot
Speaker Change: that we see today of the price in the public market would persist, then it's not realistic for us to contemplate the type of deals that we, for instance, did earlier this year and also last year. I think something needs to give before that would be on the table again.
Speaker Change: Okay, thank you, good to be here. I'll leave the chance to you.
Thank you.
Speaker Change: And we do have a follow-up from Emily Harkins at Jeffries.
Ms. Harkins, your line is open. Please go ahead.
Oh sorry, I don't have a follow-up. Okay, thank you.
Speaker Change: No further questions. That concludes our Q&A session. I will now turn the conference back over to Jacob for closing remarks.
Jacob Meldgaard: Yeah, thank you very much. Thanks for listening in here to the Q3 2024. Wish you all a great day. Thank you.
Speaker Change: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
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