Torm PLC

CSE:TRMD A

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by, and welcome to the TORM's First Quarter Results 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Morten Agdrup. Your line is now open.

[Morten Agdrup, VP and Head of Corporate Finance & Strategy]

Thank you, and thank you all for dialing in here, and welcome to TORM's conference call regarding the results for the first quarter of 2021. My name is Morten Agdrup, and I'm Head of Corporate Finance and Strategy here, TORM. As usual, we will refer to the slides as we go down and 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 our usual safe harbor statement. Slide 3, please. The results will today be presented by Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle. I will now hand the call over to Jacob.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Can you please turn to Slide 4, and thank you very much, Morten. Good afternoon to all. Thanks for dialing in. I'm happy to be here. Today, we published our results for the first quarter of 2021, and I'm, of course, also quite pleased because we this morning, have announced the acquisition of 3 LR2 vessels. The first quarter of 2021 was impacted by the continued market downturn and the COVID-19 pandemic, which lowered the global demand for oil products. For TORM, the quarter ended with an EBITDA of $19 million and a loss before tax of $21 million. As a consequence, return on invested capital was negative at 2.7%, which, of course, is unsatisfactory. Our product tanker fleet realized an average TCE rate of almost $13,500 per day. And in the largest segment, the MR segment, the achieved rates were just below $13,000 per day. Now looking into here the second quarter, we've secured bookings at almost $15,000 per day, and we are looking into a stronger result than realized in the first quarter, with now 78% of our earning days already covered. During the quarter, and as we previously announced, we purchased 8 MR vessels in our partly share-based transaction. And adding to this fleet increase, we've today announced the purchase of 3 modern LR2 scrubber-fitted vessels, for a total consideration of $121 million. Lastly, we have, after the quarter ended, also sold one older MR vessel. These S&P transactions are all part of our coverage and S&P strategy that we pursued over the last year, and that I will elaborate on here on the following slide. So please turn to Slide 5. 2020 was a special year also for product tankers, impacted by the global pandemic and the related close-downs. The product tanker market was divided into a brilliant first half, and you have to say, a not-so-flattering second half, resulting in the year ended at loss-making freight rate levels. As I mentioned, the downturn from the second half of 2020 has so far continued here into 2021. During this period, we have actively managed our market exposure. So first, in the sale and purchase market, we capitalized the strong market during the second quarter of 2020 and sold 7 older vessels. This decreased our market exposure through the market downturn that followed. Over the recent months during this market downturn, we've decided to take on additional exposure through the purchase of 8 MR vessels, and most recently, these 3 LR2 vessels. This total of 11 vessels will all be delivered during the second and the third quarter of 2021. Now, in terms of employment strategy and coverage, we also conducted a number of activities. In the anticipation of a market downturn, we increased our coverage from the second quarter of 2020 onwards. This was done through uses of both [ time-charter ] employments and freight derivatives. Especially for the first half of 2021, we decided to take additional cover, and as of today, we have covered almost the entire LR fleet for the remaining second quarter. The cover runs off over the year, down to around 50% here in the third quarter and around 20% in the fourth quarter. Similarly for the MR vessels, we've covered 71% of the days here remaining in second quarter, which will reduce gradually to 22% coverage for the third and 10% coverage for the fourth quarter. The increased spot exposure and the delivery of the 11 vessels will add to our operational leverage and support our future performance. Now let me turn to some of the drivers in the underlying product tanker market. And here, please turn to Slide 6. Now, more than a year into the COVID-19 breakout and global pandemic, the product tanker market continues to be affected by local breakouts and lockdowns. This year started with renewed lockdowns, especially in Europe, but also in parts of Asia, due to a second wave of COVID-19 cases and the emergence of a new, more transmissible variant of the virus. This resulted in a temporary reversal in oil demand recovery and strengthened the short-term headwinds for the product tanker market, which was further aggravated by the very weak crude tanker market, leading to increased crude cannibalization and [ ALR ] cleanups. The extremely cold weather in United States, nevertheless, resulted in increased transatlantic flows, as well as long-haul east-west flows, which sent LR2 spot rate benchmarks temporarily above $20,000 per day. Since then, several countries in Europe have started to open up again, while in the U.S., we are seeing really good progress in vaccination rates, which has already started to show in oil demand figures as well. Unfortunately, we have recently seen a dramatic increase in COVID-19 cases in India, which, of course, has made us increasingly concerned with the health of our colleagues in India, and which is causing operational challenges for the shipping industry as a whole. I'll touch upon this a little later in the presentation. But for now, please turn to Slide 7. As we've been emphasizing for some time now, the developments on the product tanker market are, to a large extent, explainable by movements in product stockpiles. And the inflection point on the product tanker market will most likely be reached once the current stock drawing phase ends. It's difficult to estimate the exact timing, but the inflection point is expected to be reached once more people get vaccinated, countries reopen, and the demand recovery gains momentum. Slide 8, please. As already mentioned, renewed lockdowns have negatively affected all demand recovery in recent months. Especially Europe was hard hit in the beginning of the year, where we have seen oil demand declining compared to the level seen at the end of last year. Nevertheless, we remain confident that with accelerating vaccine rollouts, the virus gets under control and the affected countries can reopen, leading to a wider recovery in the macroeconomic activity and oil demand. And indeed, if we look at the recent developments in the U.S., the vaccination rate has shown strong progress, and latest all demand indicators show improvements towards the pre-COVID-19 levels. It is most likely that there will be a difference in how fast different regions will progress with vaccinations, and many developing countries might lag behind here. But I think that we can assume that Europe will reach some sort of immunity over the summer, and together with China, where oil demand is already back and above pre-COVID-19 levels as well as the United States, these regions together cover as much as half of the global oil demand. Please turn to Slide 9. Since the end of the third quarter last year, India has seen significant improvements in oil demand. However, recently, we have seen a dramatic increase in COVID-19 cases in the country, which is indeed a very concerning development with respect to our colleagues in India, as well as the country's total population. The situation in India is also causing operational challenges, as several countries have imposed restrictions on ships that have made port calls in India. And as a consequence, some ship operators are no longer willing to call Indian ports. We are, of course, carefully monitoring the development, but we do expect to be able of fully maintaining operations also through this difficult period. From the oil product trade perspective, the current situation in India will likely not be a negative factor. Judging from India's mobility indicators, new restrictions in several regions will have a significant effect on the country's demand for transport fuels. And taking into account the country's status as a net product exporter, we will potentially see increasing flows of surplus products from the country in the coming months. Now please turn to Slide 10. And here, let me come back to the United States. I think it's an example of a country where vaccinations have, as I said, shown a significant progress. We've seen improvements in the U.S. oil demand indicators, along with the fact that almost 60% of the adult population in the country has commenced vaccinations. Demand for core products, such as gasoline and diesel, has shown significant improvements since beginning of the year, with diesel demand, actually already above seasonal pre-COVID-19 levels, while gasoline demand has climbed from 14% below the 2019 levels at the start of the year, to currently around 5%, 6% below the 2019 level. Jet fuel demand is still well below pre-COVID-19 levels, but even here, flight traveler figures show significant improvements. With these demand improvements and taking into account refinery capacity removals in the United States East Coast in recent years, we are already seeing signs of higher import needs to the region ahead of the summer driving season. And with the recent cyber attack on the Colonial pipeline, near-term imports to the U.S. East Coast are likely to get an extra boost. Please turn to Slide 11. If we look at the latest floating storage and onshore inventory data, we can see that floating storage is more or less back to what we consider a normal level, and global onshore product inventories have come down from the peak excess levels seen last summer. As a result of the refinery outage in the U.S. Gulf in connection with the extremely cold weather in February, product stocks there even fell to below normal seasonal levels here in March. This suggests that much of the stock drawing is behind us, meaning less headwinds for the product tanker market once the demand recovery gains momentum. Please turn to Slide 12. If we look at the more medium to long-term market drivers, the COVID-19 pandemic has accelerated the pace of refinery closures, with more than 2 million barrels per day of refining capacity having closed down and another 1 million barrels per day, potentially at risk of closure. Most of this capacity is located in regions which already are large importers of refined oil products, such as Europe, U.S. West Coast, U.S. East Coast, Australia, New Zealand, and also South Africa. To illustrate the significance of the mentioned refinery closures, refineries closing down or at risk account for 7% of the total refining capacity in the world's largest diesel import in region Europe, 12% of the U.S. West Coast, and 28% of the U.S. East Coast capacity. For Australia and New Zealand, the figures are even more significant. Two out of 4 refineries in Australia are closing down, and the sole remaining refinery in New Zealand is most likely to be closed down as well. At the same time, approximately 5 million barrels per day of new capacity is scheduled to come online, mainly in the Middle East and China, the regions that already today are large exporters of oil products. Both these developments are positive for trade flows and [ ton mile ] in the post '19 world. There are only a few products which are not positive for trade, most notably the Dangote refinery in Nigeria. Slide 13, please. The positive outlook for the demand for product tankers in the next 3 to 5 years coincides with a supply side which is at the most supportive for the last 25 years. The order book to fleet ratio for product tankers has remained at around 7% for some time now, which is historically a low level. The recent record high new building ordering in the container segment has filled up shipyard capacity and made it more difficult to order product tankers with delivery before 2024, which is further supporting the case of a quite modest fleet growth in the next 2 to 3 years. As a consequence, we expect net fleet growth in the next 2, 3 years at around 2% a year, only half the pace seen in the past 5 years. To conclude our remarks on the product tanker market, TORM expect to see volatility in the market in the short-term related to COVID-19 and its impact on global oil markets and economic activity. Aside from the COVID-19 effects, we see that a number of key market drivers for the next 3 to 5 years remain positive, such as, as mentioned, the refinery dislocation and a low order book, which will provide underlying support to product tankers over the longer term. Following the market dynamics, I believe, TORM is well positioned to both maneuver and utilize the opportunities in the current lower market environment through our strong capital structure. I further believe we're well positioned to utilize the coming market strengths through our operational leverage and our integrated platform. Please turn to Slide 14. Looking at TORM's commercial performance, I'm pleased that we, again, here in the first quarter of 2021 in our largest segment, the MRs, have outperformed the peer group average. In the first quarter of 2021, we achieved rates just below $13,000 per day compared to a peer average of $10,337 per day. This translates into additional earnings of $12 million. In general, I am very satisfied that TORM's operational platform continues to deliver competitive TCE earnings. Slide 15, please. A key designing factor for delivering this above-average TCE is driven by our continued focus on positioning of our vessels in the basins with the highest earning potential at any given time. In the first quarter, we had a slight overweight west of Suez, with the general market actually being at relative similar levels across these main basins when we look at the full quarter. Now I'll hand it over to you, Kim, for further elaboration on our operational leverage, the cost structure, and update the balance sheet. Kim?

[Kim Balle, Chief Financial Officer]

Thank you, Jacob. Please turn to Slide 16. With our spot-based profile, TORM has significant leverage to utilize an increase in the underlying product tanker rates. As of 31st of March 2021, we had just above 14,000 [indiscernible] earning days in 2021 and almost 30,000 [indiscernible] earning days in 2022. Adding our just published LR2 purchases to these numbers, the earnings days will increase with around 1,000 on an annualized basis. For the nearer term, we have, as Jacob has mentioned, however, deliberately taken increased coverage over the last year, in anticipation of a continued downturn in the market. And for the second quarter, we have covered 78% at almost $15,000 per day. Please turn to Slide 17. As part of our coverage strategy, we use a combination of freight rate derivatives and fiscal contracts. These freight derivatives have the advantage of providing flexibility in relation to precise timing and size of coverage, and during 2020 and throughout the first quarter of 2021, we have benefited from the use of derivatives, with a total realized amount of USD 12.2 million. However, the market value development is booked in TURM's [ TC ], and we have, over time, seen fluctuations in our result, as driven by changes in the unrealized element of these derivatives. To amplify, by the end of March 2021, the unrealized element of TURM freight derivatives had a negative market value of USD 7 million. The value then increased during April, resulting in a positive impact of $5.7 million, which was then booked in our TCE during April. Please turn to Slide 18. I would now like to review our financial position in terms of key metrics, such as net asset value and loan-to-value. Vessel values have decreased slightly during the first quarter by around 2%, with a positive momentum towards the end of the quarter and into the second quarter. The value of TORM's vessels, including new buildings and committed segment and purchases, was just around $1.7 billion by the end of the quarter. Outstanding gross debt amounted to $858 million as per 31st of March 2021. Finally, as per 31st of March 2021, we had outstanding committed CapEx of USD 210 million related to our new building program and the MR secondhand vessel purchase. This includes a noncash element of $55 million, so our cash position was $170 million. The net asset value is estimated at $788 million as per 31st of March 2021, and this corresponds to $10.60, or DKK 67.1 per share. And just before commencing this call, TORM's share was trading at just below DKK 53. I'm pleased that our strong balance sheet has provided us with the strategic flexibility to increase our fleet over the past month with a total of 11 secondhand vessel purchases. On the following slides, I will give some insights into our liquidity position, CapEx commitments, and our debt profile. Please turn to Slide 19. As of March 31, 2021, TORM had available liquidity of $329 million. Cash totaled $117 million, and we had undrawn credit facilities of $212 million. Including the committed and expected financing related to the LR2 purchase and the 2 additional sale and leaseback agreements, total pro forma available liquidity was $446 million. The total cash CapEx committed -- commitments relating to our new buildings and the MR secondhand vessels purchases were $155 million as per 31st first, 2021. This excludes the share-based payment related to the MR purchase. Including the purchase of the 3 LR2S, the total pro forma CapEx commitment stands at $276 million. With TORM's strong liquidity profile, the CapEx commitments are fully funded and very manageable. Please turn to Slide 20. After having finalized the refinancing last year, we have eliminated all major refinancing until 2026, which provide us with financial and strategic flexibility to pursue value-enhancing opportunities in the market. As displayed, we do not have any major repayments until after 2025. With that, I will leave the operator over for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of John Chappell from Evercore.

[Jonathan B. Chappell, Senior Managing Director]

Kim, I'd like to start with you. The liquidity situation seems fantastic. There's no big debt amortization coming up. You seem to be getting debt financing for all the purchases that you've made, and you have a very optimistic view on the market. I'm just curious why continuing to do sale and leasebacks, which would be higher cost debt by definition. It's one thing to do it for the third LR2 you're buying, but then you're adding 2 more ships in the existing fleet, from what I understand. Is there a reason that sale and leasebacks are still necessary, given the outlook for the market and your liquidity situation? Is this the bank financing not available at the size that you need? Just trying to understand maybe the difference there.

[Kim Balle, Chief Financial Officer]

Thank you, John, for the question. Very good question. We have a group of relationship financing institutions, banks as well as different leasing partners. So, as such, we are trying to make -- using our partnerships, but also establishing a well-diversified funding platform. So, as you can see, we have -- with the LR2s. financed through TSF, and then further via a sale-leaseback scheme. So it's basically to build up a diverse platform of different funding sources, with the pros and cons on each of those.

[Jonathan B. Chappell, Senior Managing Director]

And just correct me if I'm wrong, but are you adding 2 more ships as part of the sale stock for the third LR two?

[Kim Balle, Chief Financial Officer]

Yes, that's correct. We had the opportunity to yes, basically to -- first of all, we had the opportunity, on pretty good commercial terms, to add 2 further vessels. And then you know us on sort of liquidity and balance sheet. From a liquidity and balance sheet perspective, we like to be conservative. So having that opportunity, we just added those also, as I said, on quite decent terms.

[Jonathan B. Chappell, Senior Managing Director]

Okay. And then, the second thing I want to ask about -- and thanks for clarifying the freight derivatives. You see something like 112% of the second quarter LR2 days recovered, you start to scratch your head a little bit. Just curious on your nimbleness and flexibility around that. I mean, it sounds like the majority of them will roll off in the second half of the year. You have a far more optimistic view about the market, despite some choppiness, maybe for the rest of the second quarter. If you get to early part of June, mid-June, and you think this may be delayed, the recovery may be delayed for another quarter or 2 for whatever the case may be, do you have the ability to kind of step up those derivatives? Or are those kind of optimally timed when the market was really at a trough, and the opportunity to re-up on those has kind of passed.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So I think to your point, John, if it is so that there is a delay in the expected recovery, then it would be too late. So our base case is that the fundamental recovery for the product tanker market will coincide, as I mentioned, with the rollout of vaccinations and reopening of societies at large, and that is over the course of the second half. The exact timing could be later than 1st of July, clearly. But we are willing to take that risk right now. And I think that if you stood end of June and you had second thoughts about this, that's probably going to be too late, as you point to. The position we have now, we've taken some time ago. It's not a new position, obviously.

[Jonathan B. Chappell, Senior Managing Director]

Yes. That makes sense.

[Operator]

Our next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Jacob and Kim, also a few questions from my side. Firstly, in terms of your capital allocation, how do you internally evaluate how many vessels and how much debt to take onto your balance sheet? Because you have now been acquiring 8 vessels in March and additional 3 now, so what is the -- yes, the capital allocation strategy?

[Kim Balle, Chief Financial Officer]

Okay, just to clarify, perhaps -- and thank you for the question, Ulrik -- when we did the first eight, the [indiscernible] tankers transaction, that really didn't -- we really need any liquidity to purchase those. Those were a partly share-based transaction, 60-40, so that is quite -- it was quite a nice transaction, well-structured, we found, and we really like those kinds of structures, certainly. So for that, no liquidity needed.And of course, in this case, with the 3 LR2s, a different scenario where we needed some liquidity, and we put that in place with financing as we have displayed. So of course, it depends on the specific structure that we are looking into.

[Ulrik Bak, Research Analyst]

Okay. But would you still be in the market to purchase additional tonnage? Or is -- or do you have -- is your fleet big enough for the upcoming recovery, as you allude to?

[Jacob Balslev Meldgaard, CEO & Executive Director]

So I think, as Kim pointed, it will depend on the deal. So now, over the course of this year, we've done 2 different type of structures. One where basically it is cash neutral and where the LTV that came with the team tankers were in line with our own LTV. So that's not really moving the needle on an aggregate basis when you have 60% debt, 40% issuance of shares. It's different with the deal we have announced today. Here, you are levering up. You are utilizing cash. And so, the next deal, you could say, if we were to look at a new project, we would have to evaluate what type of structure it has. And I would lean towards that the next deal would have to be more or less fully funded, i.e., not taking away more cash until at least we're into a recovery.

[Ulrik Bak, Research Analyst]

That is very clear.

[Operator]

[Operator Instructions] Okay, so there are no further questions at the moment. Please continue.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Okay. Thank you. We don't have any questions from the web either, so we hereby end the conference call. Thank you all for listening in, and have a good day. Thank you.

[Operator]

Okay, that does conclude our conference for today. Thank you for participating. You may all disconnect.