Torm PLC

CSE:TRMD A

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to TORM's Q2 2020 Earnings Call. [Operator Instructions] I must also advise you the conference is being recorded. And I would now like to hand to your first speaker today, Morten Agdrup. Please go ahead.

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

Thank you, and thank you, all, for dialing in, and welcome to TORM's conference call regarding the results for the second quarter and first half of 2020. My name is Morten Agdrup, and I'm Head of Corporate Finance and Strategy here at 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. Slide 2, please. Before commencing, I would like to draw your attention to our safe harbor statement. Slide 3, please. With me today, I have Executive Director and our CEO, Jacob Meldgaard; and our CFO, Kim Balle. I'll now hand the call over to Jacob.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Thank you, Morten, and good afternoon, and thank you, all, for dialing in. Please turn to Slide 4. Before we commence the review of our financial results, I would like to express my gratitude to all our seafarers who made a great sacrifice during this troublesome period. As I'll come back to later, the situation for our seafarers has improved over the past weeks, but they have, especially here in the second quarter of 2020, been the true foundation of TORM's operations. As you know, the second quarter of 2020 was characterized by significant market volatility with product tanker rates reaching all-time high levels by the end of April, supported by temporary export boosts and floating storage. The strong market was a result of the COVID-19 outbreak, which dramatically reduced the oil demand, while the OPEC+ price war at the same time resulted in an increased oil production in March and into early April. However, here, by the end of June, rates had come off as the oil market started to rebalance, resulting in a significant part of the tonnage in floating storage being released. I'll go back into the details on the market shortly. But here for the second quarter, our product tanker rate fleet realized average TCE rates of $25,274 per day. And for the first half, the number was slightly lower at $24,465 per day. So here in the second quarter of 2020, we realized a profit before tax of $71 million and it was $128 million for the first half. Our return on invested capital, or ROIC, was 18.5%; earnings per share, $0.96 for the quarter; and for the first half, the number were 17.1% in return on invested capital and earnings of $1.71 per share. In Danish kroner, earnings per share for the 6 months of 2020 were DKK 11.6. With our financial results, we are pleased to distribute a total of $63 million or $0.85 per share in dividend to our shareholders. The distribution is in line with our distribution policy, where we aim to distribute 25% to 50% of the net income on a semiannual basis. These metrics are all obviously at very attractive levels, and I'm pleased that TORM has been able to capitalize on the positive market developments here during the first 6 months of 2020. We also continued our ongoing fleet renewal during the second quarter. And since our first quarter earnings release in May, we have sold 7 older vessels, covering 2 LR2s and 5 MRs. Further, our scrubber program is progressing according to our plan, and we have, as of today, installed a total of 40 scrubbers on our vessels. Lastly, I want to mention that we've executed 2 initiatives covering a total financing of around $50 million, which further supports our strong financial position and attractive debt repayment profile. Slide 5, please. Safety is top priority for TORM, and it has had an even greater focus here during the COVID-19 pandemic. And obvious issue for TORM as well as for most other owners and operators of ocean-going vessels has been the challenges with respect to crew change. While crew changes remain an issue due to travel bans and quarantine in several countries around the world, TORM has observed a very positive development since the end of the quarter. And we have performed more than 700 crew changes since the end of the second quarter. Thereby, we reduced the percentage of crew with overdue employment from around 40% to today, around 10% of the total crew on board TORM vessels. This positive development is a result of a constructive dialogue with authorities, with customers. And during this period, we've seen a great benefit from the TORM-integrated platform, which through coordination between the commercial and technical departments, has enabled TORM to perform crew changes as opportunities arose during the vessel's commercial operation. Slide 6, please. During the second quarter and so far into the third quarter, we have executed on our ongoing fleet renewal with transactions, which we believe are both timely and well-priced. We've sold a total of 7 older vessels for a consideration of $66 million, which is slightly above the Q1 2020 broker valuations, which a good price point for secondhand tonnage. As such, we have capitalized on the strong markets in March, April and May this year through these vessel sales. A total of $37 million in debt will be repaid in connection with the transactions. The vessels we've sold have been built from 1997 to 2002, and the transaction should be seen as a natural integral part of our ongoing fleet renewal. The sales proceeds will also support us to further pursue attractive opportunities in the market should they arise during a more challenging period, further supporting the company's renewal of the fleet. Slide 7, please. Now I will turn to some of the drivers in the product tanker market. As mentioned, TORM's product tanker fleet realized an average TCE rate of $25,274 per day. In the LR segment, we achieved LR2 rates of $32,732 per day, and LR1 rates of $31,655 per day. In TORM's largest segment, the MR segment, TORM achieved rates of $23,012 per day, and TORM's Handysize segment achieved rates of $15,270 per day. The second quarter was characterized by significant market volatility, with product tanker rates benchmark reaching all-time high levels by the end of April, supported by increased long-haul trade flows, floating storage and increasingly inefficient trading patterns. Following the initial COVID-19 outbreak in China and the spread of the virus to the rest of the world, the impact of the measures taken to contain the virus gained considerable momentum in the second quarter. With most of the world in some type of lockdown, the global oil demand declined at an unprecedented rate with the impact peaking in April when the global oil demand was estimated around 20% below year ago levels. The crude oil supply and refinery runs did not react as fast and sharply and this was being exaggerated by the OPEC+ price war in March and early April, leading to stock build at an unprecedented scale. This resulted in temporary trade boost from several export regions, starting with China, already in the first quarter; followed by Europe; the U.S.; India; and then, the Middle East. As the local demand was affected, the cargo needed to find a home further away, thereby positively impacting the ton-mile, both in April and into May. The unprecedented product inventory buildup boosted onshore inventories and led to floating storage. At its peak in the first half of May, 14% of the clean trading tonnage was involved in floating storage, effectively removing these vessels from the trading market. The above situation gave rise to increasing inefficiencies in trading patterns such as vessels sailing around the Cape of Good Hope in order to take advantage of the contango or cargo and demerge, trying to find new buyers further away. By the end of the second quarter, rates had come off as the oil market started to rebalance, resulting in a significant part of the tonnage in floating storage being released to the market. We currently estimate that around 4% of the clean trading tonnage is still in floating stores, down from the 14% at the peak. While the market East of Suez has seen rates being stronger, affected by abundant tonnage and lack of cargoes due to refineries running at low utilization, rates in the West, and especially in the U.S. Gulf, have remained strong, supported by increasing exports from the U.S. Gulf as well as record tight vessel availability in the region. Currently, we have around 35% of our MR fleet in the Americas, allowing us to gain from the beneficial rates in that region. The above-mentioned developments are also reflected in our bookings. And as of 13th of August, the total coverage for the third quarter of 2020 was 68% at $17,928 per day. Slide 8, please. Let me come back to the developments in the product inventories. This slide illustrates the dynamics of the COVID-19 impact on the oil demand, refinery runs and changes in product stockpiles. Initially, refinery runs were slow to react to declines in demand, leading to unprecedented inventory builds, which benefited the product tanker market. As already mentioned, the oil market has started to rebalance, with the global oil demand recovering from April lows. As refinery margins have remained very weak, refinery runs have not kept pace with the recovery in the oil demand, and we have now moved from the stock building phase to a stock draw phase. This is generally associated with headwinds for the tanker market as vessels are being released from this revolving storage and destocking lessens the demand for transportation. Slide 9, please. Indeed, the destocking has started, with offshore inventories and most of the floating storage of clean petroleum products that has been building since in March has cleared by now. As mentioned at its peak in early May, 14% of the clean trading tonnage was engaged in floating storage. While several vessels were fixed for contango-related storage business, it was especially discharging issues that tied up tonnage in so-called operational floating storage. Currently, we estimate that the tonnage that has remained in floating storage account for 6% of the clean trading fleet, only slightly above what we consider a normal level. In the light of this, I think it is important to emphasize that despite the fact that most of the tonnage tied up in floating storage has now been released to the market, our earnings has been relatively robust here in the third quarter so far. It should also be mentioned that while most floating storage in the MR segment has cleared, floating storage on LR2 vessels has been more resilient and could potentially even temporarily increase as the COVID-19 continues to impact the market, resulting in regional imbalances, although we do not expect to see the same magnitude as seen in the second quarter. Slide 10, please. If we look at onshore inventories, these have remained more resilient but have lately stabilized and even started to decline as a result of the demand recovery. And while, in general, the destocking period is not beneficial for the product tanker market, part of the high inventories are likely to be exported rather than competing with imports. A good example here is the record-high diesel inventories in the U.S., where we also have seen diesel exports currently having almost doubled from the lows seen in May. Slide 11, please. This slide summarizes the main short and medium-term effects of the COVID-19 pandemic on the product tanker market, which we have already discussed. As I mentioned before, the COVID-19 pandemic has tightened the tonnage supply considerably in the second quarter and introduced increased inefficiencies to trading pattern which resulted in record-high product tanker rates. The main trigger for these developments has been the unprecedented decline in oil demand and the resulting oversupply of products. As I mentioned earlier, we have now moved from a stock building phase to a stock drawing phase. This has already released most vessels tied up in the floating storage to the market. And while destocking of onshore stocks will not have a negative impact on the tonnage supply side, this will nevertheless lessen demand for trade as demand will be partly supplied by local inventories. However, what makes the current situation different from other destocking periods we've seen over the past 20 years is that the order book to fleet ratio for product tankers is currently at a historically low level and only covers 7% of the existing fleet. This has been further supported by the relatively low interest for newbuilding ordering so far in 2020 as a result of the uncertainties of the global economy due to COVID-19 and the uncertainties regarding the potential new propulsion system for vessels. We will, therefore, not see a significant additional pressure on the market from newbuilding deliveries at a time of destocking. Slide 12, please. Obviously, uncertainties around the COVID-19 impact on the global economy and the oil demand remain, not least in light of the recent increases in the number of actions in several countries. And while we believe the large-scale positive impact from demand-supply imbalances on the product tanker market is over, and indeed, the industry has to go through the destocking phase now, we also believe that temporary smaller scaled regional imbalances are still likely to occur, giving a boost to regional trade flows and, thereby, mitigating the negative effect of stock growth. Slide 13, please. To conclude my remarks on the product tanker market, TORM expects to see volatility in the market in the short to medium-term related to the COVID-19 and its impact on the global oil markets and financial activities. Aside from the COVID-19 effects, we see a number of key market drivers in the next 3 to 5 years to remain positive, such as a lower order book, refinery dislocation, which will provide support to product tanker rates over the longer term. The latter aspect is something that the industry has been talking about for some years now, expecting refineries, especially in the West, to close down as a result of increasing competition from newer and more efficient refineries in the East. The current situation with oil demand being impacted by the COVID-19 seems to have given a new boost to refinery consolidation, with a number of refiners in the U.S. West Coast and in Europe, recently having announced that they are going to close down. In addition, a number of refineries in other regions, such as South Africa, Japan and New Zealand are reported to shut down or their closure is now being considered. These closures are all expected to increase the ton-mile demand. Slide 14, please. Looking at TORM's commercial performance, we have, again, in the second quarter of 2020, outperformed the peer group average in our largest segment, MR. In the second quarter of 2020, we received rates -- achieved rates of $23,012 per day compared to a peer average of $19,512 per day. This translates into additional earnings of $18 million in the second quarter alone and $34 million for the first 6 months of 2020. In general, I must say I'm very satisfied that TORM's operational platform continues to deliver these competitive TCE earnings. Slide 15, please. A key deciding factor for delivering above-average TCE earnings is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. We have a balanced strategy where we generally do not position all our vessels in one basin, but instead, have some always in either East or West depending on our expectations of the future market. In the second quarter, the market West of Suez was strongest, and we also had the majority of our vessels in the West. Towards the end of the quarter, the market East of Suez improved significantly compared to the market West of Suez, and we conducted a general repositioning towards the East to capture the market. Most other owners conducted the same repositioning, which resulted in a general overweight of MRs in the east for the first time in 5 years. As I mentioned earlier, the market in the West is currently stronger than in the East. And here, the strongest areas currently are the Americas, where we have around 35% of our MRs positioned. With this, I will hand it over to Kim Balle to take us through the next slides.

[Kim Balle, Chief Financial Officer]

Thank you, Jacob. Please turn to Page 16. With our spot-based profile, TORM has significant leverage to increases in the underlying product tanker rates. As of 13th of June 2020, every $1,000 increase in the average daily TCE rate achieved translates into an increase in EBITDA of around $11 million in 2020. The corresponding figure increase to $26 million in 2021 and $27 million in 2022. As of 13th of August 2020, the coverage for the third quarter of 2020 was 68% at $17,928 per day. Please turn to Page 17. Before discussing our cost structure and financial position, I would like to remind you of TORM's operating model, where we operate a fully integrated commercial and technical platform, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for our shareholders and eliminates related party transactions. Naturally, we are focused on maintaining efficient operations and providing a high-quality service to our customers. Despite the trade-off, we have seen a gradual decrease of more than 20% in our OpEx per day over the last 6 years, which translates into a total decrease of around $44 million on an annual basis. OpEx was below $6,100 per day in the second quarter of 2020, which we find competitive in light of our fleet composition. The recent OpEx per day development is partly a result of delays in crew changes and planned maintenance due to the COVID-19. Slide 18, please. I would now like to discuss our financial position in terms of key metrics such as net asset value and loan-to-value. Vessel values have decreased by around 5% during the second quarter of 2020, and the value of TORM's vessels, including newbuildings, was around $1.7 billion as of 30th of June 2020. Outstanding gross debt amounted to $908 million as of the 30th of June 2020. Finally, we have outstanding committed CapEx of $86 million related to our newbuilding program and cash of $181 million as of 30th of June 2020. This gives TORM a net loan-to-value of 47% at the end of the second quarter, which we consider a conservative level. The net asset value is estimated to $985 million per day as per 30th of June 2020, corresponding to $13.3 or DKK 88.2 per share. And just before commencing this call, TORM's share was standing -- or was trading at $52 -- sorry, DKK 52. And in short, we believe we have a balance sheet which provides us with strategic and financial flexibility. And on the following slides, I will give some more insights to our liquidity position, CapEx commitments and debt profile. Slide 19, please. As of 30th of June 2020, TORM had available liquidity for $302 million; cash totaled $188 million (sic) [ $181 million ]; and we had undrawn credit facilities of $121 million. Our total CapEx commitments related to our newbuildings were $86 million as of 30th of June 2020. In addition to the CapEx related to the newbuildings, we also expect to pay $12 million in 2020 for retrofit scrubber installations on vessels on water. With TORM's strong liquidity profile, the CapEx commitments are fully funded and very manageable, while the liquidity position at the same time provides room to pursue new opportunities should they arise. Slide 20, please. After having finalized the refinancing in the beginning of 2020, we have eliminated all major refinancing until 2026, which provides TORM with financial and strategic flexibility to pursue value-enhancing opportunities in the market. Following the quarter end, we have entered into a $35 million refinancing with HCOB, which includes a 4-year postponement of a 2021 maturity payment. And this refinancing has not been included in the numbers you see here. As of 30th of June 2020, our outstanding debt was $902 million. Slide 21, please. Lastly, I would like to conclude our presentation with some details on our upcoming dividend payment. The dividends of $63 million or $0.85 a share corresponds to a payout ratio of 50% of the net income and is in the high end of the range of our distribution policy. Based on a share price of DKK 50, the dividends also correspond to almost 11% semi-annual dividend yield. We are very pleased that our commercial performance and strong capital structure allow us to distribute a significant amount to our shareholders and still have a very strong balance sheet and liquidity reserve to pursue value-adding initiatives. With that, I will let the operator open up for questions.

[Operator]

[Operator Instructions] Our first question comes from Jon Chappell from Evercore.

[Jonathan B. Chappell, Senior Managing Director]

For either one of you, the 50% payout ratio, I know that's within your range, but maybe a bit of a pleasant surprise just given the uncertainty in the market and maybe the choppier near-term outlook. Given that the next semiannual dividend is several, several months away, can you talk about your capital allocation plans for the next couple of months? The third quarter bookings are pretty decent, so you should still be very cash flow positive. And with the limited debt amortization, how are you thinking about use of capital as we get to the end of this year and into early next year?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. Thanks for that, Jon. Jacob here. So what we are looking at now is that we have, as you point to, we've delivered a strong set of numbers for the first half. We will be distributing half of this by virtue of a dividend being paid out. The rest is obviously available to the company. At the same time, we have released further financial -- finances by selling off about 10% of our fleet in vessel sales here since our last call and our last release. So that puts us to the capital allocation we are thinking of on top of the distribution is really to take advantage of, potentially, as you point to a choppier market where rates are lower than what we experienced in the first half so far and where we also see that there could be potential opportunities to take on new capacity onto the platform at attractive prices. So I think that will be, at least in the immediate future, that will be our focus area.

[Jonathan B. Chappell, Senior Managing Director]

Okay. And then just as a follow-up, just if we tie all your slides together, very limited CapEx commitments, but it's covered by financing, somewhat de minimis debt amortization over the next several years, market outperformance. And you're one of the few companies that actually publicly provides an NAV. I have to think at some point, with your dividend distribution with all the other positive things I've already mentioned, this discount starts to become a perpetual frustration. So if you could just speak maybe a little bit strategically about how you feel about the discount to this NAV and what plans you may have to hope to narrow it.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. I can -- I have to confess, Jon, that, that is absolutely also a frustration on our side. I think it is, unfortunately, not a company-specific thing. It does look as if the broader market in terms of shipping stocks, but also specifically, when we look at the product tanker space, that the discount to NAV is generally across this sector, and names is quite high also from a historical perspective right now. And I think it is going to be hard work on our side to continue to demonstrate that we are actually, as you point to, a superior platform that delivers the highest return on invested capital in the industry quarter after quarter. And that we, at the same time, are distributing when times are like this that we are giving back to our shareholders. Of course, it's a balancing act, as you all know, about being prudent about our own capital structure. And on the other side, rewarding the shareholders with the timings. But I think that's what we can do. And then I see it as a broader theme that investors in general have been probably a little scared about the consequences for transportation and energy stocks of the COVID-19. And I must admit that if I take a step back and think about how I felt about this just sort of before the summer back in June, I was probably more nervous than what our figures have shown us so far. We are going to be delivering a positive result also for the third quarter, and that is not necessarily the way I felt about how the world would evolve only a couple of months ago.

[Operator]

And your next question comes from Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Yes. Jacob, Kim, also a few questions from my side. The latest data points point to a large inventory level, as you mentioned, both at shore, but also as floating storage, which I suppose will affect rate for some time. Can you please provide an update of the current market from your perspective and what dynamics are at play at the moment? And if the market balance will improve from here or get worse before it gets better. And also, if you can shed some light on when you expect inventory levels to be back at normal levels.

[Jacob Balslev Meldgaard, CEO & Executive Director]

Thank you. That is a very good question. I think just taking a step back, inventories have peaked, whether it's floating or onshore, then they did peak here. Floating storage probably back in May and for onshore, inventories in the key trading hubs probably back in June. So we are going to have to live with that there is going to be a period here of destocking. I'm actually -- you can say, I've been positively surprised about how fast the destocking and rebalancing of the vessels in floating storage have actually taken place. Yes, we still have, let's say, around 6% of the clean trading vessels in floating storage. The normal level is around 4%. So you can say this difference of around 2% is, of course, something we will have to work ourselves through. But it is not a big number. It's not a 10% or 15% number that we're looking at. And the fact that the global economy is today, I think, drifting towards a trajectory that is positive. Of course, there can be setbacks, either very local or in countries around the world where the COVID-19 will affect demand. But I think today, as a global community, we are better placed to handle the COVID-19 positive and negatives sort of from an economic point of view today than what we were back in March. So I expect that from here, we have had a deep caught-in demand, and there has been a buildup of storage onshore and on all type of vessels. However, from where we go from here, I do see that as a positive territory in terms of underlying demand, and there will be volatility around it. So I think my best estimate is that, yes, there will be a period here where we have to brace ourselves for that, that there's a lot of uncertainty. But coming back to -- if I look at the Q3 bookings we've done so far, they are actually at a decent level. Our PBT breakeven for the quarter is around 15. These rates are in the vicinity of around 18. If this is the big storm for TORM, I'm, very, very pleased, obviously.

[Ulrik Bak, Research Analyst]

Okay. That makes sense. And then second question is to the sale of your vessels. You've sold now 7 vessels in a relatively short period of time. And you mentioned that you thought the timing was right and it's a part of your natural evolvement and to bring on younger tonnage or decrease the age of your vessels. But do you see yourself selling further vessels? Or are you more in the market for buying younger secondhand vessels?

[Jacob Balslev Meldgaard, CEO & Executive Director]

It really depends on the vessel pricing. The ultimate cover in our industry, we often talk about -- so what have you then covered going forward? When you've sold 7 vessels, in our case, we have actually taken 10% ultimate cover. So those vessels are out of our equation. And we are willing -- obviously, we have the capacity on our platform, and we also have the financial flexibility to go out and potentially acquire tonnage when we deem that the price points are right. So I think we will leave it up to -- the market will dictate what we see as the right move. But I would expect that prices will have softened in this environment where rates are more choppy and where volatility is higher than the underlying asset prices is that there will be opportunities to buy. But of course, if we're wrong and the markets prove to be -- behave differently, and vessel prices go north, then we are also willing to sell. But it was a good timing for us where demand was strong and where the buyers were willing to transact at or above our broker values for tonnage that, from time to time, can be -- where you kind have experience in that it can be difficult to sell more than 1 ship. That we transacted 7 over a relatively short period is something that we saw strategically as a very good opportunity.

[Ulrik Bak, Research Analyst]

Okay. And then my final question, to your dividend payments. Very sizable dividend payment of 50% of your biannual net income. Can you please elaborate on what might distribute 50%? And if you consider doing share buybacks, given that the share is trading at a discount to NAV?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes, absolutely. So as we point to, we look at this on a semi-annual basis. We have a distribution policy in place for the past 5 years where we distribute between 25% and 50%. And currently, with the strength of our performance, then to go to 50% was actually very natural because we have room in our sort of balance sheet, in our structure, both in terms of where our net LTV is, which is right in the sweet spot of where we think we should be at the current point of the cycle and also the availability of cash. So it's very natural for us to be distributing 50% at this -- where the company is so strong. Going into this first half, we already had a balance sheet that was strong. Now we have one that is even stronger than what we had before, even after having distributed. If you then come to the point around whether you should be distributing as a dividend or whether as share buyback. Yes, absolutely. We have evaluated and what we've seen we have on a number of times actually done, share repurchases have served as part of this, it's not had a meaningful effect and we are getting to a stage where we think that the free float in our shares is trumping the opportunity for us to go in and narrow the gap on NAV. And obviously, the shareholders we have would think that it would be beneficial to have more TORM shares can absolutely go and use the proceeds here and utilize them against buying off stock in their own right.

[Operator]

And your next question from the phone comes from Espen Landmark from Fearnley.

[Espen Landmark Fjermestad, Head of Research]

Interesting slide, I guess, always. I'm looking at Page 8. Maybe one shouldn't get too smart about this, but I think by many metrics, it seems we built more product inventories than crude during this pandemic, I mean, as you said, refiners haven't been able to match the utilization with the demand loss. I think most agencies have crude balances reversing back to average levels by year-end. I mean, you anticipate the same trend on the product side? Or is that more of a '21 event given the relatively large portion of product being built there?

[Jacob Balslev Meldgaard, CEO & Executive Director]

Yes. So I really think it depends on the development in the global economy because, ultimately, obviously, the refined products had to have an end user, which is one of us, so to say. So the choppy road ahead of us on the recovery track for some normalization in utilization of the various refined products will dictate where we end, on your question. But if we look at Slide 10 in the deck, I would say that it is somewhat comfortable that we today, when we look at the CPP inventories in key trading, are already trending down and that it doesn't take that much to come into it where we've been in a situation back in 2015, where we had to be very patient over several years before inventories really came back to the 5-year averages. I don't think it will take as long. But whether we will look at it by year-end or early 2021, I think it's too early to tell. It really depends on the COVID-19 development. It depends on how the global economy fares and absorb that. But I think as I tried to describe, also in the voiceover here of the slide is that it is quite encouraging that we are already now at this juncture, eating into inventories, whether it's floating or whether it's onshore, because that's, of course, that is -- that can be quite painful to come back to a normalized supply demand picture for the trade. But I see it as positive that we have not built up more and that we are already engaging in this rebalancing of the inventories.

[Espen Landmark Fjermestad, Head of Research]

Okay. That's helpful. I know it's a difficult question. Maybe it's a bit on the sideline, but the refinery industry, obviously, in a pretty dire state at the moment. I think it's been even underutilized even before the COVID-19. So you said your refining closures potentially has a positive impact in terms of the ton-miles. I guess we can see that. But do you think there's other implications from a shipowner perspective of that industry being more consolidated?

[Jacob Balslev Meldgaard, CEO & Executive Director]

So if you think of other negative consequences, and then I would argue, no, there is still -- it is still a relatively fragmented industry as such, when you look at it. I don't think that the fact that you will have consolidation will necessarily lead to that you will have less demand for transportation. So I don't see that. I really see that the areas where you are closing down, either where you have already decided to permanently shut down or where closure is under consideration, that is in areas where you will be needing to import refined products into it. It is U.S. West Coast. It is Japan. It is South Africa CSR. And these areas will not be able -- even though there would be refinery consolidation in the industry as a whole, there is still going to be a gap between local production and then the underlying demand in those areas when and if there's refinery closures.

[Operator]

And we have no further questions from the phone at the moment.

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

Okay. The questions from the web, I believe we have -- there was a couple, but I believe, we have answered those in the Q&A session. So with that, I would like to thank you all for dialing in. And with that, we'll end the call here of our second quarter telco. Thank you. Bye.

[Operator]

Thank you. That does conclude our conference. Thank you for dialing in. You may now disconnect.