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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining TORM plc 6 months ended and Second Quarter 2020 Results Call. [Operator Instructions]
I would now like to turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead.
Thank you for dialing in, and welcome to TORM's conference call regarding the results for the second quarter and first half year of 2022. My name is Andreas Abildgaard-Hein and I'm heading Investor Relations in TORM. As usual, 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 2. Before commencing, I would like to draw your attention to the Safe harbor Statement. Please turn to Slide 3. The results will be presented by Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle. Please turn to Slide 4. I will now hand the call over to Jacob.
Thanks a lot, Andreas, and good afternoon. Thank you all for dialing in. It's really a pleasure to me to be here today. We have published our results for the second quarter of 2022. And here, let's get into it, we achieved an EBITDA of $153 million and this is equivalent to a profit before tax of $107 million. The TCE across the fleet ended just shy of 30,000 at 29,622 per day. And here, as per the 14th of August, so that's last Friday, we had then faced 2/3 of the open days here in the third quarter of 2022 at even higher rates at $45,462 per day. Here, after the end of the second quarter of 2022, we purchased 75% of the shares in Marine Exhaust Technology reached TORM's ME Production. ME Production, they produce solutions to reduce air pollutants in connection with marine transportation.
And TORM, we have had an extensive historical relationship with ME production, including joint ownership of a scrub production facility. Now by purchasing our majority part of ME Production, we are acquiring 70 people with R&D and with production capabilities. And here, as we see it in a world of ongoing supply disruption, the acquisition will help us to timely secure the sourcing of the important equipment that it means for further optimization of our fleet. During last quarter, we announced that we changed our distribution policy.
And today, I'm pleased to announce that TORM's Board of Directors has approved a dividend of $0.5 million per share, and the distribution amount would be around $47 million, and this is in line with this new distribution policy. Lastly here, in the introduction, I would like to put some focus on TORM's ability to utilize now the strong second-hand prices to also divest and for us, 7 of the oldest vessels in our fleet. These vessels have been sold from the back end of last year until the end of the second quarter of this year, and they had an average age of 18 years, and this added $62.8 million of liquidity after debt repayment. Further, year after the end of the second quarter this year, TORM has decided to order an additional 8 scrubbers for our fleet. That means that we will be reaching a total of 68 when this scrubber investment program is complete.
Please turn to Slide 5. Now since the start of the Russian invasion on Ukraine back in February this year, we've seen a strong improvement in the underlying product tender rates. And here, in fact, in the second quarter of 2022, the quarterly rates billed by our MRs were the highest since the fourth quarter of 2005. The predigital situation has added great volatility to the market. But every time the regs have fallen back from peaks, the new loans are higher than the levels that we saw earlier, indicating an underlying strong upward trend. Although the geopolitical tensions in Europe, the sanctions against Russia, they have contributed to the current strong freight rate environment, fundamental drivers that are not directly related to the geopolitical situation here in Europe has been an important factor as well.
And you have to mention some of the key drivers in U.S. Gulf refiners, they've been running at a utilization rate above 95% over the second quarter of 2022 and even slightly higher in July of this year. This has led to strong exports from the U.S. Gulf, which have been met by strong import demand here to mention, especially South America. Strong product inflows caught there some discharge delays on the West Coast of Mexico. This led in turn to logistical floating storage in that region.
We also saw exports of oil products from the Middle East to Europe, to Africa and Asia increased here in the second quarter despite delays at the ramp-up of secondary units at the new Jazan refinery. Demand for imports from countries which have recently seen the refinery closes and yet to mention the most notably are Australia, New Zealand, and South Africa, those imports also continue to grow in the second quarter but the year, leading obviously also to a stronger demand for our services. Please turn to Slide 6. Over the coming 2, 3 years, we see that the main demand and supply drivers or the product tanker market will continue to be highly supportive. The key demand-side driver is expected to be the EU ban on Russian war products, which leads to a to recalibrate the whole board product trade ecosystem little lengthen trade instances and hence, obviously, increasing the ton-mile demand for tankers.
The trade recalibration effect comes on top of the changes in the refinery landscape with recent refinery closures in importing regions and new capacity additions in the exporting regions, which is expected to lead to higher ton-mile demand. Further board is expected again from the need to replenish both commercial but also the strategic oil inventories in many countries and inventories have been growing for 2 years now. This will lead to an additional trade volume again supporting the underlying product tanker market. We should not disregard the fact that the current environment with high oil prices and a high inflationary pressure on the global economy are likely to slow down the growth pace of the global volume end. The sign of this was seen in the U.S. recently where gasoline demand is summer reacted to the high prices and fell below last year's wells after gasoline prices reached record high levels.
Nevertheless, we believe that the effects of the redistribution of the energy supply chain will overweight the potential negative effects caused by slower demand growth and it will be further supported by the need to refill commercial and strategic reserves once the oil price structure would be supporting that. Further, the increasing oil use in power generation and the gas to all switching in industry, especially in Europe, are likely to add further support to global oil demand.
Now if we turn to the supply side, to the right side, the product tanker supply situation has not been as favorable as we see it right now for, let's say, at least the last 2 decades. And with the current low order book with the limits and newbuilding activity and actually also the strengthening that is ongoing right now of the crude tanker market, this will all contribute to this. So even if we come into an environment with high earnings over longer, this will trigger more newbuilding ordering activity, but these vessels would not come to the market before at the earliest end of 2024 or for the majority even later. And this will secure that we are looking into a scenario with low fleet growth for at least the next 2 to 3 years.
Please turn to Slide 7. Now on this slide, what we try is to quantify the expected increase in ton-mile from the drivers for this year that I mentioned earlier. And here, when we do a bottom-up and calculate the EU ban on Russian oil products and the corresponding trade recalibration will add a net of 7% to the product tanker ton mile. This is purely based on changes in trade distances only. So for instance, Northwest Europe, imports season from the Middle East instead of from the Russian oil products, it will increase the time made for the same amount of fuel by around 3x.
Now this is a permanent effect, which will bring the fleet utilization rate to a new higher level as shown as the sanctions against Russia are innovate. On top of that 7%, we expect a ton-mile growth of 3% from the continued oil demand recovery from the COVID-19 effect during the year. This comes to include as well the impact of the recent refinery closures in, for example, Australia, New Zealand, South Africa, which with the import to all of these regions actually increasing.
And as mentioned already on the to supply side, it's really protected for the coming years. We see a low fleet growth for this year and also the next couple of years. And the overall order book fleet ratio is now at 5% with contracting activity for the past 4 quarters being very low. So when we add that later, we can also look at that we need to deduct the Russian on product tanker fleet that will no longer be available to the world market due to sanctions, and this will keep the accounting for about 2% of the total product and the fleet.
Finally, since the beginning of the year, we've seen a considerable number of elatankers shifting into early trades on the searching of Aframax rates immediately after Russia invasion Ukraine. And then we saw a shift partly back to clean trades at a keen trend of sanction earnings client above the earnings. And this has led in total to a 2% net decline in trading LR2s compared to the beginning of the year.
Now please turn to Slide #8. And here, when we look more closely on the impact of EU sanctions in Russia, we can say that, so far, we've actually only seen a limited shift in trade pattern and the full demand effect will only be recognized by early February 2023 when the EU sanctions will come into full effect. If we look at European oil products from Russia and more than this is diesel, the average daily volume so far this year are actually even slightly higher than what they were last year, meaning trade recalibration as, in some ways, even not started.
Nevertheless, imports from non-Russian region have increased, reflecting the recent refinery closures in Europe, which have led to increased import demand into the region. If we look at more detailed data, European imports from Russia have actually declined since February 2022 when Russia invaded Ukraine, but the decline has been relatively small and from a high base. The positive impact on the freight rate has, however, been significant already. This recalibration will be facilitated by the ramp-up of the Jazan refinery, as already mentioned in Saudi Arabia and the start-up of the Al Zour refinery each way, both scheduled for -- to coincide in the coming months.
And here, kindly go to Slide #9. If you look at medium and long-term demand priors, which go beyond the trade recalibration due to the geopolitical conflict we are facing in Europe right now. We have already seen more than 2 million barrels per day of refining capacity being closed down permanently and a further $0.6 million is scheduled to be closed down during this year and into next year. On top of that, another 1 million barrels per day of capacity is at risk of being shut down.
Most of the effective capacity is located in regions which are already large importers of refined oil products such as Europe, the U.S. West Coast, the U.S. East Coast, and again, the 3 countries that I mentioned a number of times as trade-in New Zealand, South Africa. But here, even in regions where refiners were only closed down in 2020 or 2021. We have not seen the full effect on import demand yet as oil demand has not come back to the pre-COVID-19 levels. At the same time, more than 4 million barrels per day of new capacity is scheduled to come online mainly in the Middle East, China and India. Regions we saw today are the large exports of all trucks. Both these trends are positive for trade flows and TORM in the coming years with only a few projects, which are less positive for the trade.
Slide 10, please. As already mentioned, oil product inventories have been reduced since the summer of 2020 as refinery production has lagged behind the recovery in automate. This is especially the case for people where inventory in main training hubs have fallen to 20% below pre-COVID-19 levels, the same magnitude as the excess stock seen in the early months of the COVID-19 pandemic. So we need here, to replenish the stock to at least pre-COVID-19 levels translate into higher fuel transportation needs, adding at least 2% to the ton-mile demand for product tankers.
Now the exact timing of this 2% effect is concerned, given that currently, we have a tight supply-demand situation for diesel and on top of that, a backward dated price structure. And here, kindly turn to Slide 11 in the deck. Now our positive outlook for demand for product tankers in the next 3 to 5 years coincides with the supply side, which is the most important, which it has been for at least the past 25 years. With record high newbuilding prices and limited shipyard space, tanker ordering has been muted for the past 4 quarters.
And as you know the overbook has consequently fond to fleet ratio for tankers at a historically low level of 5%. This is further supported by similar historically low 5% order book fleet to ratio for crude tankers. Consequently, the big growth here in the next couple of years will be around only 1% to 2% a year, which is only half the pace that we've seen on average over the past 5 years.
So yes, conclusion -- my concluding remarks on this product tank market is that we really expect that we will continue to see volatility on the market, of course, due to the current view political tension, but that there will be considerable ton mile increases due to the ultra-rerouting. This is supported, again, by the increased refinery dislocation effect and the need to rebuild depleted crude and product inventories.
Please turn to Slide 12. If we take here, look, as you can see of TORM's commercial performance, we had with our self-imposed trading restriction performance on the average of our peers and in almost all quarters during the past 6 years, we have outperformed our peers in our largest meter-class AMR. Here in the second quarter of 2022, we achieved rates of $29,174 per day. In general, I'm highly satisfied that the one-ton platform continually again now deliver strong results on a day-to-day basis. I turned to Slide 13. Our strong TCE earnings are driven by our continued focus on positioning our vessels in the basin with the highest in potential. If we look at the second quarter of 2022, we again had an overweight of the Suez Canal where we also saw an outperformance when looking at the full board. So with this, hand over to you, Kim. And you can dig further in and elaborate on the cost performance, our liquidity, and course of trading in our stock.
Thank you, Jacob. As Jacob mentioned, we are seeing a continuous rate increase in the tanker market in the second quarter of '22 with our TCE rates reaching $29,622 per day. Spot rates are just below $35,000 per day for the quarter due to our accounting principles part of the revenue related to the increasing rates at the end of the quarter will be recognized after the company. So far in the third quarter of 2022, we have seen a further increase in TCE rates per day, and we have now fixed 67% of our data at $45,462. Due to higher repair and maintenance costs, we saw an increase in our operating expenditures during the second quarter of 2022. However, for the first part of 2022, showed opening per day was at $6,325 compared to $6,652 per day in 2021.
Yes, we are at Slide 14 for your information. TORM's admin costs in Q2 2022 was dollars at $4,500. So we will maintain our growth on cost optimization without jeopardizing quality and customer polls. The full-year normalized EBITDA breakeven is expected to be around $8,600 per day.
Please turn to Slide 15. TORM continues the strong performance with EBITDA for the first 6 months of 2022 being at $214 million. Why is vesting certain of our older vessel as Jacob mentioned in the beginning and having the LR2 TORM has delivered? During the second quarter of 2022, net LTC decreased to 43% due to an approximately 13% increase in vessel value compared to the first quarter of 2022 and strong cash generation from our operations. While CapEx commitments are limited, our cash position is very solid. We are now planning to install a total of 58 scrubber on our fleet. The investment in the 8 additional scrubbers will be around $16 million.
Please turn to Slide 16. TORM will distribute approximately 74% of the net cash generated during the second quarter of 2022 as dividend, consistent with our distribution policy announced earlier in May 22. Our distribution is based on cash position, including the working capital facility, that total of $23 million, less restricted cash primarily related to financial instruments of $24 million, less MR proceeds of $4 million and a minor cash reserve for investors of $120 million. We have included $14 million related to the sale of a vessel which was delivered in July, but the related debt was paid down in June. In conclusion TORM will distribute dividends per share of $0.58 or approximately $47 million. We have with our new tenant distribution policy, and that it will already now benefit our shareholders.
Please turn to Slide 17. During the second quarter of 2022, we repaid debt of $42 million, debt repayments related to the sale of TORM Horizon and some good ones constitutes $9.8 million. oat our maturity profile, we have no later refinancings until 2026. We have low financial leverage, dedicated MR proceeds, which provides TORM with financial and strategic flexibility to also pursue value-enhancing opportunities should they arise. We are very pleased with our stable maturity profile and financial leverage.
Slide 18, please. Since the establishment of our dual listing back in 2017, we have worked on getting a better reach to the U.S. market. We are therefore pleased to see that the average daily trading has increased by almost 4x over the past year with our U.S. market picking up strongly. Trading volume at NASDAQ, New York accounts for approximately 57% of the total trading volume during the second quarter of 2022.
Since the end of Q1, TORM's market cap increased by approximately 115%, which is also supported by our operational leverage. TORM currently maintain a high operational leverage, which means that and assume $1,000 per day increase in spot rates over the course of the full quarter, other things being equal, result in a net profit effect of $7.2 million. And right before we enter into this meeting, the TORM share was trading at in DKK 154 with total market cap for us around DKK 12.6 billion. And in U.S. dollars, that will equal around just about $1.7 billion. With that, I will let the operator open up for questions.
[Operator Instructions]
Now our first question is from the line of Jon Chappell from Evercore.
My first question, I'm trying to recalibrate Slide 7 and 8. And on Slide 7, you have the ton-mile the start of '22. -- ton-mile started 23 with the 7% impact from the ban in Russian oil products. But then on the next slide, you say that it really hasn't even started yet, and it won't really kick in until 2023. So is this 7% that you're incorporating within the start of '22 to start of '23, your estimate for the full impact of this recalibration in a pro forma manner? Or are you saying there's a 7% impact this year and then once the sanctions truly kick in, in February of '23, there's the potential to be even greater?
Yes. Thanks. So let me clarify that. So what we are trying to describe on Slide 7 is exactly to your question, is to illustrate what will be the full effect between January 2022 up until January 2023 of the trade recalibration. Our estimate is that out of the 7% that we model out above 2% of this is already baked into this. So there's still more to come. And then the 3% additional is also over the year, the effect of the refinery dislocation and just the demand growth.
Got it. Okay. That helps. And then my second question is a clarification and then a question off the back of it. In your release, you note that 6 vessels that are held for sale at the end of 2Q '22. But if I read the timing of the vessel by vessel, it looks like the Ingeborg, the Valborg, Gyda, and Moselle would be the 4 that hadn't been delivered as of 6/30 because the other 4 were delivered before the end of the quarter. So I'm just trying to figure out those 4 and how that relates to 6 held for sale. And then the second part of that would be, does that either insinuate? Or would you confirm that at this part of the market, you're still looking to liquidate some of the legacy older vessels in your fleet?
You're absolutely correct in everything that you described. And so 4 vessels, the ones measured by you have been sold. And then there are 2 vessels that were contemplating potentially selling that we, in our books at puts for sale.
Okay. And then I guess the final one would be after the 2 that you're contemplating for sale, how many over 12-year old vessels would be remaining in your fleet? And would you figure at some point in this upturn, you would contemplate the completion of the modernization of the fleet?
That's a good point. I don't think that we are -- I can go back to you on how many over 12, but I think what we see as a useful lifetime of our assets is actually, as you can see from the way we put it is, on average, around 18 years. So we don't really have a particular strategy to lower that, especially with the earning power that we foresee for all assets irrespective age in the current environment.
The next question is from the line of Richard Diamond from Castlewood Capital.
If someone were to order a new ship, which has a useful life of 18 years and take delivery in 2025. What would they use for a power plant, LNG is too expensive. Ammonia is too dangerous, and methanol has half the energy density of diesel. So you'd have to either build a much larger tanks on ships or reduce the distances that ships would be able to travel. Do you have any thoughts?
Yes. Thanks for that question, Richard. I think my current instinct is that as you point to with you are an investor who decided on, let's say, in 2025 to have an asset where the usual lifetime goes up until almost close to 2050. And we have, at this stage, no clarity on the future fuel as such, of course, we can say that's probably going to be within the range of what you just described. I think the true investor will purchase a vessel that has a conventional engine type, i.e., ability to efficiently burn low sulfur or high sulfur fuel with a scrubber.
But what you would want is for that engine to have the optionality and flexibility to be able to already now be retrofitted for other fuel sites, for instance, methanol or LNG or others. And then the problem comes that, that retrofitting would come at a relatively high CapEx because the CapEx with the transformation into other fuel types, it's not really with the engine itself. It is with the storage of the fuel and storing of sufficient fuel in order to make transiting a workable happen, I say, methodology for their assets. That's the way I think about it currently.
This is a follow-up question. So the cost of such a ship would have to be 15% to 20% more. And given potentially the shorter life, rates would be -- have to be substantially more expensive to justify the investment. Am I thinking about it correctly?
Not necessarily, probably your line of thought. I think the additional cost from what I just described is marginal because what I just described is really you're preparing to make the bigger investment at a later stage. So you are actually just making a flexible engine. And that is possible with, for instance, MAN that you have an atonic engine that can already be prepared with very little modification to use different types of energy. So out of the box, it of course is much more marginal higher than what you described. Then of course, ultimately, you will need to make the storage tanks available on board the ships. And that is where you would have the ramp-up to the probably 20% is a fair estimation of that in the current environment.
The next question is from the line of Anders Karlsen from Kepler Cheuvreux.
Yes. I have a question in terms of term fixtures and your view on what levels would be enticing enough for you to start fixing your ships and whether or not you have picked out any ships for longer-term charters during the quarter.
Yes. So the answer to that question is that there is more interest from the top of counterparties, which we would like to engage with today than what we saw, let's say, when we had our Q1 we saw back in May. But we've still not been enticed to engage in that. I think some of the end users are slowly starting to look at strategically taking tonnage for, let's say, 3-year charts, and it could be that it will be interesting in the time to come here to look at something like that. But we have not done any deal at this stage.
Okay. And do you have any -- if you were to start fixing is there any limit to how much of your fleet you would fix out? Or do you have any preference in terms of your spot contractor exposure?
No, I think it will depend on the liquidity in this term market is not at this stage, very high. So I think it would simply be the availability of the counterparts of sufficient quality as #1 and to the other side. So I wouldn't put a particular figure on -- we don't have a strategy that we want to be spot. We just see that so far is the strategy that has generated the highest return to the company over time.
So there are no more telephone questions at this time, and I hand back to Andreas Abildgaard-Hein.
Thank you. We have a few questions on the webcast. And the first one is for you, Kim. You mentioned that was up rate for Q2 was almost $35,000 per day, which is higher than the TCE rate. So there's a question here. Can you please just clarify the difference between the spot rate and the TCE in rate?
Yes. Thank you, Nick. You're right on your comment that you will see that it is written on Page 10 in the quarterly report with the batten. The waste spot on the TCE. But on top of that, our revenue recognition principles are what we call low to discharge. So that means that when we fix a voice, we fix it with a sharp eye until we load it, that is not recognized as revenue until we load the cargo. So in a scenario where you at an end of a quarter, for instance, and you fix on an increasing rate, you have a high spot rate, but you will -- but you have a full recognition or much of the recognition of that revenue in the coming months/quarter. So in the scenario we've been in the end of the Q2 quarter, we actually saw, I think we have of the revenue going into the next quarter. So it's there, it's just going into the next quarter, and then we don't know what will happen at the end of that quarter, but that's how the revenue recognition definition is. Hope that helps.
Thank you, Kim. And a question for you, Jac, could you talk about the downturn in rates we have been seeing on the recently the TCE report? How sustained is that downturn? And does it trend downward TCE rate for MR as well.
Yes. I can try and talk into that. And what we've seen, at least is that again, the Atlantic Basin MR rates East, somewhat my impression is the same as I've described earlier in our presentation in the call is that we will have volatility when we are at these levels, small changes in demand-supply leads to relatively high changes in the underlying freight rate simply because we are so high out on the utilization curve. So we've seen that trend over the last couple of weeks that the rates are a little softer for MR and the Atlantic. The specific of it, I believe, is just that there has been a little less number of cargoes coming out of some of the refineries is basically on the U.S. side and that, that simply takes away just the top of the market. I don't think it's an underlying trend that will lead to changes in other sectors.
And I don't think that it is a trend of now we've seen the end of this market. But it's absolutely correct that currently in the western hemisphere, the MRs have traded down from the highest. It was actually so that just in the early part of August, we fixed an MR in the U.S. Gulf at around 8,000. And if you did the same way today, you will probably get something around 30% to 35%. That's high volatility, I would say, because as you all understand, that's nothing that has fundamentally changed in our market. So I think we're going to see this tendency to a very high volatility continue. I don't see as something that will lead into the other states.
Thank you, Jake. The final question. What are the risks that the EU Russian embargoes on Russian oil and oil products are missing ports?
Yes, that's a very good question. I think it's more for conditions and diplomacy to give the answer. But the inside our thought is that let's just play out that the more in Ukraine comes to an end abruptly very, very soon. That could be my personal hope that this offering in Ukraine stops. And as in turn, what will then be the decision-making process in the EU around the 6 sanctioned package and other sanctions on the regime in Russia? Personally, I can say that I would be disappointed if the war comes to an end and that we then see that we turn everything back to normality being as the world was before the 24th of February 2022. However, of course, that is something that volition would be capable of deciding. That's not my instinct that, that is the undercurrent when I listen to diplomats and politicians in the EU. But it is, of course, something that one should think about as a risk, I think it's unlikely.
`Thank you, Jac. No further questions. So this concludes the earnings conference for the second quarter and first half year of 2022 results. Thank you for participating.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.