Torm PLC

CSE:TRMD A

Earnings Call Transcript 2018-Q2

[Operator]

Thank you all for standing by, ladies and gentlemen, and welcome to today's TORM's Q2 2018 Report Webcast. [Operator Instructions] Please be advised the call is being recorded today, Thursday, 16th of August, 2018.I would now like to turn the conference over to your speaker, CEO of TORM, Mr. Jacob Meldgaard. Thank you, please go ahead.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Thank you. And thank you for dialing in. Welcome to TORM's conference call regarding the results for the second quarter of 2018. My name is Jacob Meldgaard, and I am the CEO of TORM.As usual, we'll refer to the slides as we speak. At the end of the presentation, we will open up for questions.Slide 2, please. Before commencing, I would, as usual, like you draw your attention to the safe harbor statement.Slide 3, please. With me today presenting is the CFO of TORM, Christian Søgaard.Slide 4, please. As you know, we have this morning reported an EBITDA of $29 million for the second quarter of 2018, and a loss before tax of $8.6 million or USD 0.12 per share. The return on invested capital was 0.1%.Our results reflect a weak second quarter in the product tanker market, sliding freight rates towards especially the end of the quarter. However, freight and activity level have picked up a bit in the third quarter of 2018. Across all segments, our average TCE rate was $12,944 per day during the second quarter.In April, we executed newbuilding option for 3 high-specification MR product tankers, with expected deliveries in 2019 through the first quarter of 2020. The aggregate purchase price for these 3 vessels was $93 million and this compares favorably to the values assessed by brokers at the end of the quarter, which are approximately 20% higher than our average purchase price.During the second quarter, we also took delivery of 1 LR2 newbuilding and our fourth and final LR2 newbuilding is scheduled to deliver next month. All in all, TORM has 10 more vessels to come, 1 LR2, 2 LR1s and 7 MRs. At the end of the quarter, our fleet including newbuildings had a market value close to $1.7 billion.As of 30th June this year, our available liquidity was $442 million and TORM's net loan-to-value stood at a conservative 54%.If we look at the freight market today, we had as of 7th August, 55% of our remaining Q3 earning days at an average TCE of $11,856 per day.I'll now focus on some of the primary market drivers that we are currently following.Slide 5, please. Overall, global end-user demand for refined products remains firm, supported by healthy economic growth. The strong fundamental demand outpaced the refinery production in the second quarter of 2018, leading to draws on the global inventory and as a consequence of reduced demand for seaborne transportation. We therefore, also experienced a soft sliding market for product carriers in the second quarter of 2018, and we are still only beginning to see activity and freight rates having the potential to pick up.Looking at bit further ahead, we see an intact and healthy fundamental balance in the product tanker market. End-user demand is firm, and growing especially in the developing regions of the world like for instance, China, India and the rest of Asia.I'll go into a bit more detail on the market drivers and its rational levels here in the market going forward on the following slides.To summarize, we believe that the fundamentals are in place for a market recovery and that the demand-supply balance will continue to improve in favor of product tanker owners over the coming period.Slide 6, please. Part of the reason for the soft market conditions in Q2 have been a seasonal reduction in production capacity due to maintenance on the refineries in the Middle East and also in Far East. These refineries have now completed maintenance, and as we see the production capacities, it's more or less back to normal. We have also seen that there is an increase in export from this region particularly for diesel, which is also expected.At the same time, the otherwise very strong U.S. export market has been disturbed by politically motivated strikes in oil-related industry, and a higher domestic refinery production in Latin and South America.And finally, I can mention that the cannibalization of the product market from crude carriers has continued and was a significant sector here in the second quarter. It does remain a factor and will continue to do so as long as the current depressed state of the crude tanker market continues.Slide 7, please. As I mentioned earlier, global product inventories have declined during the past quarter and are now below the 5-year historical average levels. While continued draws are obviously not sustainable over the long term, price backwardation deters floating stores and also reduces inefficient sailing patterns. A tight diesel market in Europe, coupled with easier refinery maintenance in Asia, could lead to better arbitrage opportunities, but we will have to wait and see on this.In the first 5 months of this year, we estimate that inventory drawdowns have been influenced with loss of trade of somewhere between 1.5% to 2% each month. However, in the 3 months to May, stock draws increased and are estimated to be as high as even 6% to 7% of this rate during that period.Slide 8, please. The structure dislocation between demand and export centers is expected to continue, and more refined products will be produced and exported from the Middle East to the rest of the world. If we compare the forecasted net capacity addition from Middle East refiners, the next 5 years, it translates to a level almost 30% higher than the capacity additions we saw in the previous 5 years from 2013 through 2017. So here, it's clear that this structural trend continues even at an increased pace.Slide 9, please. The IMO 2020 regulation is expected to be a potential booster for demand for product carriers as it will come into force, now in less than 18 months. For the shipping industry to comply with this regulation, it will be necessary to build and maintain stocks of compliant low sulfur fuels in bunker ports around the world, which should create new consumable trades for product tankers.At this point, we are forecasting a potential increase in demand for clean products of up to about 2 million barrels per day. This is an estimate based on obviously, many moving parts, but we do expect the IMO 2020 regulation to have a positive impact on the demand for clean product carriers and we estimate currently, the potential increase to be around 5%.Slide 10, please. The product tanker fleet to order book is at the record level -- record low level and we can see that deliveries of new tonnage have started to fall. So far this year, we've seen 65 new product tankers delivered from yard, and with a considerable number of scrubbers in recent months, we see net fleet growth year-to-date of 1.2%. The product tanker order book to fleet ratio currently stands at 10%. This is low in a historic context. And even as we look forward, if we consider potential new ordering adding to the known order book, we are forecasting that the ratio will fall to around 7% to 8% by the end of 2019. This is for us a key point in that we're looking at a fundamental positive development in the product tanker industry going forward.Slide 11, please. As you can see from the graphs, newbuilding prices have started to increase in the second quarter of 2018. At the same time, coinciding with relatively active MR ordering. Vessel values for the modern product tankers have stabilized, even though there's been relatively limited second-hand activity. Prices of older tonnage have been under pressure due to that -- a significant number of candidates have been available-for-sale and an absence of buyers.Slide 12, please. With our spot-based profile, TORM has significant leverage to increases in the underlying [ processing ] rates. This is particularly true for 2019 and 2020, when our unfixed days increased as a result of the growth in our fleet. As of 30th of June, 2018, every $1,000 increase in the average daily TCE rate achieved, translates to an increase in EBITDA of around $11.8 million for us in this year alone. This figure increases to $29 million in '19 and to $31.3 million in 2020. TORM has a positive long-term view on the market and we believe that we are well positioned to generate significant cash flows.Slide 13, please. As we have seen in prior quarters, TORM's operational platform is capable of delivering very competitive TCE earnings. In fact, if we look back over the past 3.5 years, we have outperformed our peer group adversely in 13 out of the 14 quarters. Our ability to perform well compared to peers, is a substantial factor and translates into additional earnings of $14 million in the first half of this year alone.Now I hand over to Christian for a further review of TORM's cost structure and financial position.

[Christian Søgaard-Christensen]

Thank you, Jacob. Please turn to Slide 14. As we have been discussing earlier, TORM operates a fully integrated commercial and technical platform and also employs an internal sale and purchase team. We believe that we derive significant competitive advantage by internalizing these functions and importantly, it also provides a transparent cost structure for our shareholders and eliminates the possibility of related party transactions.We are focused on maintaining efficient operations, and providing a high quality of service to our customers. And still we have seen a gradual decrease in the OpEx figures over the last 5 years and TORM's scale and ability to exercise cost control is illustrated by our highly competitive operating expenditures. We also remain disciplined with respect to general and administrative expenses, although these can be expected to fluctuate a bit going forward, as they are based on the size of the fleet. In the last year, we have opened a number of new offices and also invested in digitalization and business intelligence.Slide 15, please. As of 30th of June, TORM had available liquidity of $442 million. Cash total $159 million, and we had undrawn credit facilities and newbuilding financing agreements in aggregate of $283 million. Our total CapEx commitments were $306 million as of 30th of June, of which, $46 million are falling due in the remainder of 2018. The remaining CapEx will fall due in 2019 and the first part of 2020, as we take delivery of our new high-specification vessels. Our strong liquidity position provides us with sufficient funding to meet our CapEx obligations as well as provide the firepower in accretive growth opportunities.Please turn to Slide 16 for an overview of our debt profile. TORM's outstanding gross debt amounted to $731 million as of June 2018. We do have a very favorable financing profile with 62% of the schedule installments falling due after more than 3 years from now. Our net loan-to-value was 54% at the end of the quarter, which we considered to be a conservative level at this point of the business cycle.So to recap, our balance sheet does provide us with ample strategic and financial flexibility.Slide 17, please. So with this, I will let the operator open up for questions.

[Operator]

[Operator Instructions] We have one question, it's from the line of Jon Chappell.

[Jonathan B. Chappell, Senior Managing Director]

Christian, just to your last points on the liquidity. The market stayed bad for longer than we expected and you still have pretty ample liquidity, but if the market were to extend kind of in the current levels, are you looking at other ways to kind of fortify the capital structure or the balance sheet? A lot of your peers, both in crude and product, have been doing some sale and leaseback transactions, is that something TORM would consider? Do you feel that you're in a good position right now?

[Christian Søgaard-Christensen]

Jon, thank you for that question. I should start by saying, our starting point is actually pretty comfortable. But if the market was to continue at the price level as we have seen here, we are sure we would look at the ways of diversifying our funding profile and the -- but it hasn't been relevant for now, it's something that we've been looking at, but for now, we have been more awaiting the situation.

[Jonathan B. Chappell, Senior Managing Director]

Okay. And then to go the complete opposite of that as far as opportunities are concerned. Jacob, you mentioned that the newbuilding prices have started to move up, but second-hand, asset values have stabilized and maybe even come down a little bit. Do you think that now is an opportune time to continue to renew your fleet with more modern second-hand acquisitions or will you just continue to integrate the newbuilds and let the fleet go as it is right now?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So thanks for that. So yes, clearly, with the diversions on that newbuilding products have been keeping up at the same time as you can say modern second-hand either keeping level or maybe get a tick down, then clearly, you would be incentivized in an investment case to opt for a modern second-hand right now. So that would be our choice. However, as you also point to, we have an investment program already on the newbuilding side. What we are focused on there is to also equip these vessels with scrubbers, so that's where we've put some additional investment into that rather than adding to the fleet.

[Jonathan B. Chappell, Senior Managing Director]

And that's a good lead into my final question. Scrubbers on MRs seems to be a bit rare, given the shorter haul of the ships and maybe more port time than oceangoing time. Can you just talk to us about the total capital commitment to the 14 scrubbers and the decision on why employing them on a fair amount of the MRs?

[Jacob Balslev Meldgaard, CEO & Executive Director]

So correct, that the larger the vessel and the more that you would be going to additional, major bunkering hubs, it, obviously, caters to that the trading pattern is easier to benefit from the scrubber being onboard. However, what we are experiencing is that given that we actually have our vessels at the shipyard, now being built and constructed scrubber ready, and that we can contain, therefore, the associated cost with installing scrubber, that the business case for us is intact for having these investments also on the surface. But the cost that we have for the scrubber inflation, depending slightly on size of the vessel but it is around just shy of $2 million in -- on average for our fleet.

[Jonathan B. Chappell, Senior Managing Director]

Okay. And the $306 million of remaining capital commitments on the newbuilds, that includes the scrubbers?

[Christian Søgaard-Christensen]

No, that's pre-scrubbers. So this is for the original building contracts.

[Jonathan B. Chappell, Senior Managing Director]

So just add about $2 million per ship -- per newbuilding?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Correct.

[Operator]

[Operator Instructions] No questions coming in as of this moment. Sir, please continue.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Thank you. So this concludes the earnings conference call for the second quarter of 2018. TORM will release its third quarter results on 15th of November, and we look forward to providing you with an update on our business at that time, and we'll keep you posted on any interim developments. Thank you for dialing in.

[Operator]

Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating. Have a great day.