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Ladies and gentlemen, thank you for standing by and welcome to TORM's Q3 2019 Conference Call. [Operator Instructions] I must advise you, the conference is being recorded today on the 12th of November 2019.I would now like to hand the conference over to your first speaker today that's Morten Agdrup. Please go ahead.
Thank you, and thank you for dialing in, and welcome to TORM's conference call regarding the results for the third quarter of 2019. My name is Morten Agdrup, and I'm the Head of Corporate Finance and Strategy in TORM. We will refer to the slides as we speak, and at the end of the presentation, we will open up for questions. Slide 2, please. Before commenting, I would like to draw your attention to our safe harbor statement. Slide 3, please. With me today is Executive Director, Jacob Meldgaard, and he will be hosting the call. Slide 4, please.
Thank you, Morten, and good afternoon. TORM's third quarter 2019 results reflects the softer market conditions in the product tanker segment. Going into the fourth quarter, the product tanker market has strengthened significantly, and as the demand and supply balance tightens towards the upcoming IMO 2020, individual events have caused spikes in the product tanker freight rates to levels last seen in 2008. We remain excited about the developments in the market, and I'll now take you through our results. In the third quarter of 2019, we realized a positive EBITDA of $32 million and a loss before tax of $8.5 million or $0.12 per share. TORM's return on invested capital was positive at 0.4%. The estimated net asset value was $887 million as of 30th of September, and later in the presentation, I'll take you through a breakdown of this metric. Illustrating our continued focus on maintaining a solid balance sheet, the net loan-to-value was 50% at the end of the quarter and available liquidity was $337 million. With respect to the freight rates, TORM realized an average TCE rate of $13,392 per day in the third quarter of 2019. In the third quarter and so far into the fourth quarter, we have taken delivery of 3 MR newbuildings and 4 2011-built MR vessels acquired during the second quarter. We've also sold 4 older vessels, 2 MR vessels and 2 Handysize vessels. The vessels have been sold for a total consideration of $35 million, and a total $18 million in debt will be relayed in connection with the vessel sales. 2 other vessels have already been delivered to the new owners.In support of our strong capital structure, we also entered into 8 sale and leaseback agreements in the third quarter of 2019, providing total proceeds of $151 million. We repaid $39 million in debt concurrent with these transactions.TORM's preparations for the IMO 2020 regulation are proceeding as planned. We are pursuing a balanced approach, and we've decided to install scrubbers on an additional 10 vessels, bringing the new total to 44 vessels. We have to date installed 16 scrubbers.Like most other owners, TORM has experienced some delay in the recent scrubber installations. In order to reduce the risk of further delays and to capture the current market strength, we have decided to postpone some installation into the next year. For the vessels using compliant fuels from 1st of January, we have initiated our customized schedules towards compliance, and the first volume of compliant fuels have been delivered and successfully tested onboard our vessels here in the third quarter.Slide 5, please. Now I will turn to the product tanker market. In the third quarter of the year, our product tanker fleet realized average TCE earnings of $13,392 per day. In the LR segment, TORM achieved LR2 rates of $14,529 and LR1 rates of $14,292 per day. For TORM's largest segment, the MRs, we achieved rates of $13,125 per day and TORM's Handysize segment achieved rates of $12,251 per day. In general, product tanker freight rates were soft in the third quarter as global demand for all products remain subdued. Product tanker rates were generally stronger in the East than in the West. In the West, transatlantic gasoline flows were at healthy levels, but the lack of volumes into West Africa and low-naphtha arbitrage flows to the East kept rates suppressed.In the East, the market experienced quite a bit of volatility driven by attacks on tankers in the Strait of Hormuz in the beginning of the quarter, the return of export-oriented refineries for maintenance in the Middle East and India in the middle of the quarter, and finally, attacks on Saudi Arabia's crude oil facilities mid-September, affecting half of the country's crude production.Although the effect was only temporary and most of the affected capacity was back online again by the end of the month, Saudi Arabia [indiscernible] runs at several refineries in order to meet its crude export contracts. This resulted in a decline in product exports from the Middle East. The start of the fourth quarter has been quite different, with an unprecedented strong sentiment in crude tanker markets as a result of the sanctions on the COSCO fleet. This had a strong positive effect on the product tanker market as well. The effect has been supported by increasing demand for clean cargo movements between regions. For instance, we have seen diesel flows increasing from China on record high-refinery runs and from the Middle East after the refineries have come back to full utilization after the attacks on the country's oil facilities.In the West, U.S. clean petroleum product exports have been kept by refinery maintenance. At the same time, we have seen increasing demand for cargoes from West Africa as well as the U.S. West Coast, where the latter is currently experiencing unplanned outages at one of the largest refineries in California.The events just described in the fourth quarter is also reflected in our bookings. As of last Friday, 8th of November, the total coverage for the fourth quarter of this year was at 63%, and the rate was $19,531 per day. In our largest segment, the MR, the coverage was 61% at $18,095 per day. Slide 6, please. As we just saw on the previous slide, the fourth quarter started with a strong rebound in product tanker rates. Let me elaborate on this a little. At the beginning of the fourth quarter, the crude tanker market experienced a sudden boost in rates following the sanctions on COSCO, which impacted around 4% of the global VLCC fleet. The positive sentiment had a spillover effect on the product tanker segment, where rates for all vessel classes, but the large product carriers in particular, increased significantly before retreating to current levels. The dramatic rise in crude tanker rates also triggered around 5% of the LR2 fleet trading in clean petroleum products to switch to the dirty market, which will help sustain the product tanker rates medium term. Slide 7, please. Another matter I would like to draw your attention to is the fact that diesel inventories in the Atlantic Basin are currently very low, while we are in a period where seasonal winter heating demand as well as IMO 2020-induced increase in diesel demand starts to kick in. On the U.S. East Coast, inventories are currently at 5-year lows, and well beneath 5-year averages.Diesel inventories in the Amsterdam-Rotterdam-Antwerp region are also below 5-year averages. With increased heating demand in the winter months as well as increased demand for diesel in connection with IMO 2020, restocking will likely be required in the coming months, leading to higher diesel flows into the Atlantic Basin. Low diesel inventory levels are one of several factors supporting our positive market outlookSlide 8, please. The increasingly positive market sentiment continues to impact vessel values. Values for modern LR2 vessels are currently up by 25%, and values for modern MRs, are up by 13% compared to last year's averages.Newbuilding activity has been relatively low so far this year. Although as the market sentiment has improved, we've seen increased interest for newbuildings in recent months with even some early orders for LNG-based dual-fuel vessels emerging. Newbuilding prices are currently around 12% higher than the lows that we saw back in 2017.Slide 9, please. Now in less than 50 days, one of the most significant reforms in the shipping industry comes into effect, the so-called IMO 2020 regulation on sulfur content in marine bunker fuels. While the direct effect of this will be higher bunker cost throughout the shipping community, we continue to expect that it will have a positive demand effect on product tankers, as the potential increase in demand for marine gas oil will increase the need to transport gas oil or diesel across regions.Today, almost 4 million barrels of high-sulfur fuel oil is daily used at marine bunkers. Vessels fitted with scrubbers will continue to use high-sulfur fuel and the remainder of the fleet will need to switch to 0.5 sulfur fuels. We continue to expect that considerable part of the new 0.5 sulfur fuel will be diesel-based or based on plants containing diesel. In more detail, we currently expect an incremental diesel demand of around 1 million barrels per day from IMO 2020. And this will be an important contributor to the overall growth in ton-mile demand that we currently expect would be around 7% in 2020. IMO 2020 effects will account for more than half of this growth figure with the rest based on other market drivers. However, this growth figure will depend on the speed of the refining industry's ability to shift to very low-sulfur fuel oil production, also known as VLSFO.I think it's also important to mention here that IMO 2020 will also have a positive impact on the tonnage supply side, as a number of vessels will be removed temporarily from the market in combination with scrubber retrofitting and tank cleaning. This could potentially lower the fleet supply by up to 1%.Let me elaborate on the demand effects of IMO 2020 on the next slide. So please turn to Slide 10. Stricter sulfur rules mean that the shipping industry would need to use additional marine gas oil, which is a type of fuel that belongs to the family of diesel. Whilst demand for diesel will increase in all world regions, flexibility to increase diesel production is generally higher in regions which are already net exporters of diesel.For example, considerable volume of new refining capacity coming online in the Middle East and Asia may facilitate increased exports. Russia is producing more diesel as part of its refinery upgrading program and the complex U.S. Gulf refineries have capacity to convert additional high-sulfur fuel oil that becomes cheaper hereafter 2020 into diesel. At the same time, the main importing regions, the ones that produce too little diesel, do not see any new refineries coming online in the next 2 years. Therefore, their ability to respond to increased demand due to IMO 2020 is limited to changes in refinery utilization and product use. This suggests that on top of the trade flows we are seeing today, even more diesel will be flowing from export regions to import regions. The majority of the incremental demand growth will come from long-haul trade and intra-Asian medium-haul trade. But on top of that, we also expect to see some more short-haul regional trade for redistribution of compliant bunker fuels. Similarly, crude tankers are expected to gain from IMO 2020 due to increased refinery runs and the corresponding need for crude transportation, trade with VLSFO and the need to store excess high-sulfur fuel oil.Please turn to Slide 11. And here now, we will turn to the supply side market factors. The product tanker order book to fleet ratio currently stands at 6.8%, which is a 25-year historical low level. We estimate that the product tanker fleet growth will exceed 4% this year, but lower deliveries in the next 2 years will result in an average fleet growth of around 3% per year in the period 2019 through 2021. This is down to around half of an average of almost 6% during the previous 3 years. It's also important to mention here that the actual fleet growth in 2019 might come in at a somewhat lower level due to this as being temporarily removed from the market for scrubber retrofitting.As I mentioned before, recent improvements on the product tanker market have led to some more interest for newbuildings. Although we've been foreseeing some increase in ordering activity with the improved market, we do not expect a quick run-up of the order book given the uncertainty around new potential regulations on vessel propulsions in connection with IMO 2050 CO2 targets. The slowing fleet growth rate is a key point to the fundamental process of development that we expect for the product tanker industry in the years to come.With that, please turn to Slide 12. To conclude my remarks on the product tanker market, TORM has a generally positive outlook, and we expect the growth in the product tanker demand to exceed the supply growth in the next 3 to 5 years. The product tanker market is impacted by key economic indicators such as underlying oil demand and the general state of the economy. And here, we have seen some weakness this year. But the segment-specific factors I mentioned are expected to impact the market positively going forward. In particular, IMO 2020 is an exciting development for the market that will certainly bring about both expected and unexpected outcomes.Slide 13, please. Shipowners have 2 choices to comply with the upcoming IMO 2020 regulation. That's the scrubber installation, which can be done on either newbuildings or through retrofitting. The second option is to use compliant fuels on vessels. TORM's preparations for the IMO 2020 regulation are proceeding as planned. We're pursuing a balanced approach that will result in 44 vessels, slightly more than half of our fleet being fitted with scrubbers. We expect that a total of 23 of our scheduled scrubber installations will be finalized by 1st of January, and the remaining 21 retrofit installations are expected to be conducted during the first and second quarters of 2020. In the first quarter, we expect to install 12 scrubbers, and in the second quarter, the corresponding number is 9. We do not expect the retrofit installations to have an impact on our overall performance, as each installation is carefully planned, taking commercial and technical considerations into account through our integrated One TORM platform. TORM's compliance strategy compared to the world fleet is balanced. And looking at peers, most have chosen to go either with installing scrubbers on old vessels or using compliant fuels on old vessels.With respect to the vessels in the TORM fleet that will be using compliant fuels, we are implementing our 2020 compliance plan, which includes changing bunkers onboard each vessel. As mentioned earlier, we have successfully tested the new compliant fuel on our vessels during the third quarter, and are now bunkering the fuel on our fleet. The bunker planning and replenishment will be a gradual process and be timed around individual vessels, voyages within the quarter. We expect that other owners are following a similar approach, gradually increasing demand for compliant fuels until the end of the fourth quarter. To support this process, we expect global ports to stock compliant fuels and to continue to build inventories throughout the year.Slide 14, please. The business case for installing scrubber has become even clearer as 1st of January approaches, with the support being reflected in the price spread between 0.5 compliant fuel and high-sulfur fuel oil. The spread for the calendar year 2020 is currently around $238, declining $287 in the calendar year 2021. We expect that the price of compliant fuel and the spread versus high-sulfur fuel oil will be volatile for a period of time before normalizing. And additional scrubber benefits may be realized beyond what the current forward spread indicates.Slide 15, please. Looking at TORM's commercial performance, we had even our largest segment MR outperform the peer group average 18 out of 19 times since 2015. This translates into additional earning of more than $110 million over the period. This quarter, we achieved rates of $13,125 per day compared to a peer average of $13,069 per day. In general, I am very satisfied with the TORM's operational platform, which delivers competitive TCE earnings, and TORM is well positioned to take advantage of the promising supply and demand fundamentals in the market.Please turn to Slide 16. Before reviewing our OpEx and admin expenses, I would like to remind you of TORM's operating model. We have a fully integrated commercial and technical platform, including all support functions, such as an internal sale and purchase team, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for all our stakeholders, including shareholders and eliminates related party transactions. Naturally, we are focused on maintaining efficient operations and providing a high quality of service to our customers. Despite this trade-off, we have seen gradual decreases of 17% in our OpEx per day over the last 5 years. OpEx was approximately $6,100 per day for the third quarter of 2019. And for the 9 months, the corresponding norm was just below $6,400 per day, which we find very competitive in light of our fleet composition. We also remain disciplined with respect to G&A expenses. We believe that the EBITDA breakeven of $8,600 per day and profit before tax breakeven rate of $14,300 per day achieved through the first 9 months of 2019 reflect the efficiency of the One TORM platform and is highly competitive compared to other owners in the product tanker segment.Please turn to Slide 17. With our spot-based profile, TORM has significant leverage to increase in the underlying product tanker rates. As of 30th September this year, every $1,000 increase in the average daily TCE rate achieved translate into an increase in EBITDA of around $5.3 million for the year. The corresponding figure increases to $27.9 million in 2020, and to $29.3 million in 2021. TORM has a positive long-term view on the market, and we believe we're well positioned to generate significant cash flows. As of 8th of November, the coverage for the fourth quarter of '19 was 63% at $19,531 per day, which is the highest booking at this stage in a quarter since the first quarter of 2016. For the individual segments, the coverage range between $15,000 for the smaller Handysize vessel and up to above $26,000 for the larger LR2 vessels. If we exclude long-term charter contracts from the LR2 segment and only look at our spot fixings in the quarter, the coverage in the LR2 increases to well above $30,000 per day.Slide 18, please. As of end of the quarter, TORM had available liquidity of $337 million. Cash totaled $121 million, and we had undrawn credit facilities of $216 million. Our total CapEx commitment was $182 million, of which we expect to pay around $76 million this year. The remainder will fall due in 2020. The large majority of our commitments relates to our remaining 5 high-specification newbuildings that all includes scrubber installations, but we will also pay $44 million in '19 and '20 for retrofit scrubber installations on vessels underwater. With TORM's strong liquidity profile, the CapEx commitments are fully funded and very manageable.Please turn to Slide 19. And here finally, I want to sum up our financial position in terms of key metrics, such as net asset value and loan-to-value. Vessel values have increased slightly during the third quarter of 2019, and the value of TORM's vessels was USD 1.7 billion as of 30th September 2019 including our newbuildings. Outstanding gross debt amounted to $850 million at the end of the quarter, and none of our debt facilities mature in 2020. Finally, we have outstanding committed CapEx of $138 million related to our newbuilding program. And this gives TORM a net loan-to-value of 50% at the end of the third quarter. This we consider to be quite a conservative level. The net asset value is estimated at $887 million as of end of the quarter, and this corresponds to USD 12 equivalent to DKK 82.2 per share. And here, just before commencing our call, TORM's shares were trading at DKK 63.4 or USD 9.4 per share. In short, we have a balance sheet that provides us with strategic as well as financial flexibility.And with that, I'll let the operator open up for any questions.
[Operator Instructions] Your first question today is from the line of Jonathan Chappell from Evercore.
Three questions for you. First one, you laid out a great presentation on your coverage and your lower costs and your liquidity to cover your CapEx. So, therefore, there should be a cash windfall coming in, I would imagine. And so can you just remind us -- I think the dividend policy from the past cycle was 25% to 50%, and would you look at that maybe differently in the first innings of the quarter -- or the cycle maybe the fourth quarter start out slowly, and then once you've taken delivery of all your newbuildings and fitted all your scrubbers and your CapEx falls, could you foresee being a little bit closer to the higher end of that capital return policy?
Yes. Thanks, Jon. That's an important point, obviously. So first and foremost just to recap. As you point to, we have a policy where we distribute 25% to 50% of our net profit semiannually. So maybe next time, we will have -- a strategic discussion around this will be after the second half of the year. I do expect that the policy remains intact, but obviously, we need to be guided, as you point to, by the facts at the time. But with what has been laid out so far in our presentation and our expectation, I would expect that we will be evaluating whether to distribute at that time, buy back share or a dividend payout. Alternatively, of course, look at other 2 capital needs that we need to go through at that time. But with this in mind, I do expect that, depending on the results that clearly in next year in 2020, it will be much more clear what we are going to be doing. And maybe, as you point to, we need to have more of an evaluation in the upcoming second half of '19.
That makes sense. And then just a follow-up to be clear on the timing. So you would have the discussion post the 4Q results, which based on your bookings so far, would indicate profit. And then would that be like a February Board meeting with a March payment? Or would it be kind of a second quarter payment as part of the semiannual policy?
I think on this occasion, it will actually be something we will evaluate at the AGM that we have in April.
Okay. All right. My second question has to do with the scrubber retrofitting. And I understand the thought process behind delaying it given the strength of the market. But you'd also mentioned some delays. We know that you have a percentage ownership of a scrubber manufacturer. So maybe incorrectly, I assume that if there were delays, you'd still be at the front of the queue. Can you talk about how much the delays played into your decision to delay -- delays at the yard played into your decision to delay the timing of the retrofitting versus the strength of the market? And is there any compensation that you get or maybe savings from pushing back the timing on those?
Yes, very good. So to be clear -- thanks, Jon. So number one, the delay is not on the production of the scrubber. Actually, our production, as you point to, is going according to plan. We have no delays and the scrubbers are ready. The delay that we are experiencing is more of a general nature that larger vessels that are planned to have scrubbers are competing with other ship segments. So that means that you have -- basically across the global fleet, you have large container ships. You have the capesize as you got the VLCCs, all the segments you know well, basically, competing for a limited number of shipyards that cannot accommodate larger vessels.So the delay we have, to be very precise, is on our LR2s. LR1s, we've seen that there is delays of getting the scrubber installed, not the production. And we are not experiencing the same type of delays on our MRs. Because there, the number of yards that are available to us and others is significantly higher, simply because of the dimensions of the vessels.
Okay. That's very helpful. Final one...
Speaking around delays, then there was one example where we had the sort of the choice on one of our LR2s to either go into a potential dock where we would be installing and retrofitting a scrubber and that the alternative market was at that time around $80,000. So that was kind of a very easy decision to say, "Okay, let's take the money on the table and then let us delay."
Yes. That makes sense. So it's a case-by-case basis, but it seems like mostly on the larger ships. It was a yard issue. Final question for you. Very detailed view on the market and especially your expectations of the IMO impact, which we obviously agree with. But outside of a global macro recession, which seems maybe that's even -- the odds of that are lessening a little bit. What concerns you that maybe we don't get the cycle as it's laid out right now? I mean the order book really can't change. Is that maybe the IMO 2020 impact isn't as large as we anticipate? Is there some other issue on regional trade? What could possibly go wrong next year outside of a macro demand event that can kind of throw off this really good setup?
Yes. So of course, we will have to play out the scenario. So I think the scenario, which I do deem to be unlikely, but which could spoil the party here, would be that the refinery side gets their act together faster on the production of VLSFO. So that basically our theory and thesis around that, there will not be sufficient, compliant 0.5 VLSFO available from the refinery side, and that will lead to incremental demand for transportation of diesel-based refined products. That -- if that thesis should be wrong, i.e., that there is sufficient VLSFO to supply the market, then shipowners, in general, will obviously opt for that since it is cheaper.I think that's the curveball that you would have in the market. I don't see that as a -- if I look at the data points that we get from independent sources, this is not how it's playing out. But of course, if it did, that would be, I think, the party spoiler.
The next question is from the line of Espen Landmark from Fearnley.
Just a follow-up on the last one there. I mean we had big refinery maintenance in the spring and we have big refinery maintenance now in October. I think someone just said it was more than 10 million barrels. And the U.S. crude runs, they're trending lower year-over-year, and the utilization last week was low 85.5%. So it seems a bit strange seeing the crack spreads and the price differentials that we're seeing at the moment. So I guess the question is, are you concerned that some of this maintenance might reflect something else, just lack of demand?
We're not really seeing anything to that effect so far. But obviously, I think to your observation, we need to follow that. But clearly, in the trading patterns that we've got and the data points we have, we are not seeing an indication of that. That is the fact, but yes, time will tell whether it's one or the other. We do see it as a general normalization.
All right. And on Page 9, you're kind of decomposing the bunker usage next year. And you're also quantifying how much you think will be diesel, which I think is interesting. It's still early on, but any insight into what you're seeing of demand of compliant fuel at the moment? What kind of split of 0.1 and 0.5 blends the shipowners are wanting?
No. I think it's too early. In our case, the preparatory work that is taking place on the shipowner side right now is that I think everybody is preparing to clean the tanks in order to shift into VLSFO either 0.1 or 0.5. But the number of vessels, for instance, in our fleet that has already taken on board these products is very much on the margin. So I think this is the test phase, and by early part of next year, we will know much more about the demand picture, whether it's 0.1 or 0.5. I think everybody is preparing, but it's not really ramped up the demand in the marketplace in general yet. It's too early.
Okay. And maybe finally, a bit around the current spot market. It's always a bit difficult to sustain the prevailing rates, especially on the LRs. So the fixtures you're seeing at the moment, would you say they are materially different from the 4Q bookings?
As I did before this call, I checked up on that, Espen, because I think it's a very relevant question. And as of date, the bookings we have is actually almost spot on the average that we have so far.
Okay. That's -- and maybe as a quick follow-up on that. I mean just to make sure you said you don't expect any kind of impact on TCE performance from having a lot of ships in the East with scrubber installations.
No. We cannot point to the -- our earnings are negatively impacted on the vessels that we are employing from scrubbers. What we can see is, obviously, that we have, by definition, fewer operating days that we can -- that we have as earning days because of [indiscernible] Yes.
[Operator Instructions]
So we have -- in the meantime, we have one question from the web, which is where it -- with your -- based on the current newbuilding prices, are you looking to order new vessels in order to continue fleet renewal of your fleet and potentially to renew the 36 vessels not scheduled for scrubber retrofit?And I think, in general, we are always looking to have a fleet maintenance program. We've done that over a continuous period where we've taken younger vessels into the fleet and we dispose of all the vessels, and we don't have a big program where we would take out a significant number of vessels and then substitute them by new vessels. So the answer to this is that, no, we have a balanced approach where we, year-by-year, evaluate what is the best operational fit in our fleet.
There were no questions on the phones at the moment.
Okay. Thank you for that. And there are no further questions on the web. So with that, we will conclude the earnings conference call for the third quarter of our 2019 results. Thank you for participating.