Torm PLC

CSE:TRMD A

Earnings Call Analysis

TORM Posts Record Q2 Results and Optimistic Outlook

In the second quarter of 2023, TORM celebrated its strongest Q2 in history, posting a Time Charter Equivalent (TCE) revenue of $308 million and EBITDA of $237 million, rising to $199 million after adjustments. The company saw a remarkable 72% surge in profit before tax, reaching $184 million. Investors can also anticipate a $1.5 per share dividend, totaling about $126.6 million in September. Forward-looking, TORM has already secured 74% of Q3 at $30,534 per day, despite facing softer market conditions due to a temporary dip in Russian export volumes. The recalibration of trade flows resulting from sanctions has led to a step-change in freight rates, and the upcoming draw on EU stockpiles could further propel the market. Additionally, with a newbuilding order book distributed over the next 3.5 years, TORM's outlook remains buoyant as they navigate the shifting industry landscape.

Strong Performance and Dividend Declarations Amid Market Rebalancing

During the second quarter of 2023, the company experienced notable strength in its performance. Time charter equivalent (TCE) revenue rose to $308 million, with an EBITDA of $237 million, inclusive of some unrealized gains from financial instruments. Adjusted EBITDA stood at $199 million, culminating in a total of $933 million over the last four quarters. This financial robustness paved the way for generous dividend distributions, amounting to $578 million over the past year, with the second quarter alone seeing about $127 million in dividends, translating to $1.5 per share.

Market Dynamics: Third Quarter Softness with a Fourth Quarter Rebound Anticipated

Despite a historic second quarter, the company is cautiously predicting a third quarter that may be 'slightly softer', due to market shifts observed at the second quarter's end. Nonetheless, coverage of 74% at $30,534 per day hints at sustained earnings. The market's underlying fundamentals, however, signal a strengthened fourth quarter, likely driven by seasonal demand spikes and supportive metrics, such as low product stocks and promising arbitrage spreads. The consistent outperformance of the MR fleet against peers by $75 million further bolsters confidence in the company's business model and operational strategy.

Fleet Growth and Conservatism in Capacity Expansion

As the company has increased its fleet from 81 to an anticipated 86 vessels, the focus remains on leveraging robust markets to further solidify its financial stance. A reassessment of trade patterns and ongoing recalibrations are expected to sustain higher freight rates. However, a current challenge is shipyards' capacity constraints, potentially limiting the fleet's expansion. Even with an expected creep in the order book, deliveries are being secured through to 2027—a cautious but strategic conservatism in supply, ensuring manageable growth amid sector restructurings.

Consolidation Possibilities and Disposal Strategies

In the current market environment, while consolidation opportunities are welcome, no significant movements are foreseen. Investors seem content with their holdings, although the company stands ready to acquire or dispose of assets selectively. If disposals occur, they typically involve vessels in the upper age range, aligning with the strategic approach of maximizing returns on invested capital. This methodology also applies to the aging fleet management, with a demonstrated ability to operate older vessels efficiently.

Open Door Policy on Spot Markets with Strategic Hedges

The company maintains flexibility by engaging predominantly with spot markets, capturing high volatility and benefiting shareholders. Hedging activities are carefully timed, based on calculated expectations of the market, to shield against potential downturns while still remaining receptive to advantageous short-term market spikes. This dynamic approach reflects a broader strategy of adaptability and opportunism in the face of market volatility.

Staffing Costs, SG&A Management, and Asset Life Extension

Increased staffing costs were highlighted, primarily due to a new retention program (LTIP) covering 3.5 years, scheduled to expire in 2026. This long-term incentive plan is noncash and constitutes a one-off elevation in SG&A expenses, which are otherwise tightly controlled as a key performance indicator across the company. Furthermore, the company is well-equipped to handle expenses associated with prolonging a ship’s service life, relying on solid maintenance practices and targeted capital expenditures for vessels reaching the 15-year mark.

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the TORM plc Second Quarter and Six Months Ended 2023 Results Call. All line have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session [Operator Instructions]

I will now turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead.

[Andreas Abildgaard-Hein, Head, IR]

Welcome to TORM's conference call. We are pleased to have you with us and have been looking forward to presenting to you the results for the second quarter of 2023. We will refer to the page numbers that we present during the call. And at the end, you can ask questions if you're attending the phone conference. If you are joining via webcast, you can have access -- you have access to ask questions during the presentation as well. After this conference call, you will be able to listen to a recording. And as usual, you can find our presentations and other relevant data on our website.

Please turn to Slide 2. Before we start presenting the results, I would like to draw your attention to the safe harbor statement.

Please turn to Slide 3. Today's presenters are as usual, Executive Director and CEO, Jacob Meldgaard; and CFO, Kim Balle.

Please turn to Slide 4. I will now hand over to Jacob.

[Jacob Meldgaard, CEO and Executive Director]

Thank you, Andreas, and good afternoon, good morning to all. Thank you for connecting with us for our second quarter 2023 result presentation. Today, we will present the strongest second quarter in our history, a quarter that continues the performance from the first quarter of this year. We realized a TCE of $308 million in the second quarter and an EBITDA result of $237 million. Adjusted for unrealized gains on FFA contracts of $37 million, our EBITDA result increased 23% to $199 million while profit before tax increased 72% to $184 million compared to the same period last year.

Return on invested capital was 33.9% in the second quarter before correcting for unrealized gains on financial instruments related to freight and bunker. And our balance sheet remains strong with a net LTV ratio of 29% and available liquidity of $497 million. This morning, TORM's Board of Directors approved a dividend of $1.5 per share based on the second quarter, and we expect to distribute around $126.6 million here in September.

In the first half of the year, we have taken delivery of all the seven LR1 vessels acquired in early January and the three MR vessels that we announced was acquired in March. We also sold and delivered one LR1 vessel with the fleet ending at 87 vessels at the end of June. During the second quarter, we entered into a collaboration with Seabulk to participate in the tanker security program led by the U.S. Maritime administration. It means that three of our MR vessels will participate in the program and undergo reflagging to the U.S., while continuing their regular operations under TORM's commercial management when not operating under the tanker security program.

We expect this agreement to contribute positively to our earnings. As of 14th August, we have covered 74% of the third quarter at $30,534 per day, which is a reflection of the slightly lower market rates that we saw in the latter part of the second quarter as a result of refinery maintenance, product stock draws and slightly lower demand for products. As I'll be explaining in a moment, we expect the markets to recover, and we expect a stronger fourth quarter.

Now please turn to Slide 5. Since the start of the Russian invasion of Ukraine and the consequent introduction of sanctions against Russian oil products, we've seen a step change in product tanker freight rates towards a higher average level as sanctions have led to a recalibration of trade flows towards longer distances. This has also brought along a higher volatility level as the product tanker fleet has moved closer to the point of full utilization where even small changes in the underlying demand and supply are creating high volatility in freight rates.

In this environment of increased volatility, being able to position our fleet towards the premium trades and regions is even more important. And this means that having access to the right customers and the right cargo combinations is essential. We can see that we with our One Torm integrated platform continue to have strong support from our customers, and we remain confident that we will have access to the cargoes and trades that, in turn, enables us to position our fleet in the premium regions.

Here, please turn to Slide 6. When we look more closely at the main market drivers, the geopolitical conflict in Europe and the resulting EU ban on Russian oil products has been the most important demand driver side for 1.5 year now. As a result, the composition of EU imports has undergone a significant change from being mainly short-haul to being predominantly long haul. This has translated into a 40% increase in EU import ton mile during the post sanction period compared to the same period a year ago.

And this is despite the fact that EU imports have been 15% lower year-on-year which was a result of higher imports and product stockpiling ahead of the sanctions as well as the fact that EU oil demand has seen some weakness so far this year. Similarly, Russia has been successful in redirecting its clean products to markets in North and West Africa, Turkey, Brazil, and Middle East and Asia against increasing ton miles. Although here in the second quarter, we have seen some slowdown in Russian volumes due to spring refinery maintenance, which released part of the tonnage engaged in the Russian trade into the mainstream market, thereby putting a pressure on freight rates.

Please turn to Slide 7. I've already mentioned that EU imports after the introduction of sanctions have been lower than usual, partly as a result of the stock building ahead of the sanctions which meant that a portion of demand was supplied by stockpiles instead of by imports. By now, the stockpiles have been drawn down to below average levels, hence, in the months ahead, this will give a tailwind to the product tanker market.

As a consequence of low diesel stocks in Europe, the Middle East to Europe diesel arbitrage spreads have been recently widened to the highest level since the sanctions against Russia were officially introduced. This is likely going to encourage increased trade flows, further amplified by seasonally increasing diesel consumption in Europe towards the winter months, which will be supplied by long-haul sources, hence, boosting ton miles. So China increased its export quotas that would be a further upside to the market.

Please turn to Slide 8. We've already seen the product tanker market rebounding here in the first half of the third quarter with increased product flows out of almost all main exporting regions, encouraged by global, complex refinery margins reaching record seasonal levels. Underlying this development is the global oil demand scaling record highs, averaging an all-time high of 103 million barrels per day in June. And it is not only driven by China. Also, oil consumption in industrialized countries has returned to growth. Subsequently, clean product volumes loaded on LRs and MRs globally have rebounded from the lower levels seen during the second quarter.

Please turn to Slide 9. Further supporting the product tanker market is the fact that since the start of this year of 2023, a considerable number of LR2 vessels have switched from clean to dirty trades. This has reduced the clean trading LR2 fleet by a net of 9% with recent crude export cuts in Russia and Russian crude trading above the G7 price cap. However, this factor is not likely to provide further support to the product tanker market in the coming months. As Aframax rates have weakened significantly, we can potentially also see some switching back to the clean trades should these export costs stay for longer.

And here, please turn to Slide 10. When we turn towards more fundamental drivers, not related to geopolitical conflicts, we have for some time been emphasizing the importance of the changes in the global refinery landscape with closures in some of the main importing regions and new capacity being added in exporting regions. Much of this new capacity is located in the Middle East and up until now has been slower to start up than expected. Hence, we have not seen the full effect of these new refiners yet. But it is important to mention that all these new refiners that are ramping up now. Furthermore, the new capacity is, to a large extent, concentrated around middle distillates, which we believe will be part of the higher long-haul diesel arbitrage flows that we expect for the coming months and years.

Please turn to Slide 11. And here, let me turn to the supply side drivers. After years of, you could say, subdued newbuilding activity, product tanker ordering at shipyards has picked up this year, and currently, the order book stands at 10% of the fleet. However, what is important to note here is that the current order book is spread across 3.5 years of deliveries. This translates into a 2.8% growth rate on an annualized basis. Also important to mention here is that with order books that shipyard filled up for the next 2.5 years, any new additional orders are to be delivered not before 2026. And furthermore, a number of the recent newbuilding orders has involved yards, which are really newcomers to the product tanker market.

When we look at the fleet supply, in the second half of this decade, there may be even more availability for product tanker orders at shipyards. Subsequently, we could see higher deliveries of newbuild vessels not least due to the need to renew the aging fleet. However, this will coincide with a significant increase in recycling potential as the fleet built in the 2000s is reaching their natural scrapping age. Consequently, the net fleet growth could even turn negative in the second half of this decade.

Please turn to Slide 12. Another aspect important to mention in connection with the recent pickup in the LR2 ordering is that given the versatility of the LR2 fleet, we can trade both clean and dirty products. The LR2 order book should be seen in connection with the dirty Aframax order book. The combined order book is currently at 11%, which compares with 5% of the combined fleet reaching 25 years old during the same period. And if we consider that this segment normally has a lower average scrapping age which has historically been 21 years, then readily up to 23% of the fleet could be removed from the market in the next 3.5 years.

Please turn to Slide 13. Now to conclude my remarks, on the product segment market, we see that the main demand and supply drivers on the product tanker market continue to be supportive. The trade recalibration that already started last year and that has led to a step change towards higher average freight rates will continue to support the market also this year with new large refineries ramping up in the Middle East being an important driver in this development.

We are on track to reach the full trade recalibration effect, although we saw some fallback in the second quarter on lower trade volumes both into Europe and out of Russia. So far here in the third quarter, we've seen trade volumes starting to rebound and key oil market indicators such as refinery margins and arbitrage spreads point towards further increases in trade volumes being transported over longer distances. As we also discussed, the positive demand side is complemented by a supportive supply side situation securing a low fleet growth for at least the next two to three years.

With that, let me hand it over to you, Kim.

[Kim Balle, CFO]

Thank you, Jacob. Please turn to Slide 14. Focusing on our earnings development during the second quarter of 2023, we once again obtained strong performance. TCE increased to $308 million in the second quarter, which is higher than both the previous quarter and the same quarter last year. Sequential increase from the first quarter of 2023 is mainly due to unrealized profits from financial instruments related to freight and bunker of $37 million.

Our EBITDA for the second quarter was $237 million including these unrealized gains. After adjusting for this, our adjusted EBITDA was $199 million. And over the past four quarters, we have achieved an adjusted EBITDA of a total of 920 or sorry, $[ 933 million ]. During the same period, TORM has declared dividends of a total of $578 million, including the dividend announced earlier today, while also increasing the fleet from 81 to 87 vessels and reducing our financial leverage.

Please turn to Slide 15. If we look at our largest vessel class, the MR class, they have performed strongly also when comparing to our peers. Including the latest four quarters, TORM has consistently outperformed our peers with an average rate of $33,862 per day, equaling a premium of TCE of $75 million. Needless to say, we are very pleased with this performance and see this as a validation of our business model and our One Torm platform prediction models consistent positioning of our vessels in the basins that give the highest earning.

Please turn to Slide 16. If we dive further into the details of our TCE rates, the average rate for MRs for the second quarter were $33,862 per day; for LR1s $36,674 per day; and for LR2s $47,918 per day. The average across the fleet rate was $36,360 per day. Based on our rates and coverage as of 14th August 2023, we have fixed a total of 74% of our earning days at $30,534 per day in the third quarter across the fleet. All of our vessels classes rates were on average around $30,000 per day. Hence, the softer market we saw towards the end of the second quarter will naturally have an impact in the earnings for the third quarter.

Part of the mentioned coverage has been made with FFA contracts and as per 14th August 2023, the coverage for the coming quarters was [ 825 ] LR1 earning days fixed at approximately $45,000 per day and 1,478 MR earning days fixed on approximately $40,500 per day on average.

In the second quarter, we had 7,398 earning days, and we expect to have 7,685 earning days in the third quarter based on full effect of the vessels acquired during the second quarter and taking into account that TORM Freya was sold and is expected to be delivered in the third quarter.

Please turn to Slide 17. We continue to evaluate our opportunities for fleet expansion and renewal. Thus, we have acquired and taken delivery of a total of 10 secondhand vessels in the first quarter of this year and has sold one vessel. This means that as of 30th June 2023, the value of the 87 vessels that we had in our fleet reached $3.1 billion, which is an increase of $875 million since the same time in 2022.

The vessels acquired in the first half of this year alone have increased by 8% in value since we acquired them. The vessel value increase resulted in a net asset value of $2.5 billion at the end of June 2023, which is $1 billion higher than the same time last year. Since the end of the quarter, one vessel has been sold and is expected to be delivered in August. Hence, by the end of the third quarter 2023, we expect to have 86 vessels in our fleet. As mentioned, we will distribute around $127 million or $1.5 per share based on our cash balance at the end of -- cash balance at the end of the second quarter.

Consistent with our distribution policy, our distribution is derived from the liquidity available for distribution, adjusted for a minimum cash reserve of $1.8 million for 87 vessels as well as cash reserved for future acquisition and restricted cash. Over the past 12 months, TORM has utilized the strong markets to strengthen our financial position while at the same time paying out a total of $578 million, equivalent to 74% of the net profit generated in the period.

In the second quarter, we completed the refinancing of bank and leasing facilities for $480 million and further secured a $73 million facility that can be used for additional secondhand vessel financing. After the completion of the refinancing, total debt increased by $70 million, of which $50 million are related to purchase of the three secondhand MR vessels that were delivered during the second quarter. Interest rate hedges cover 70% of the floating rate debt at a rate of 1.4% over the coming five years and combined with our fixed rate leasing, 83% of our debt is fixed over the coming years.

Please turn to Slide 18. Summing up, the performance we delivered in the second quarter was historically strong compared to the second quarter results in the past. It is a reflection of a continued strong product tanker market and the largest fleet in TORM's history that resulted in an increase of EBITDA of 54%.

Recent softer markets have provided TORM with 74% coverage at $30,534 per day for the third quarter of 2023. Thus, we expect the delivered result in the third quarter to be slightly softer than in the second quarter. However, market fundamentals and dynamics are pointing towards a stronger fourth quarter. We are both seasonally increasing demand. Lower product stocks and arbitrage spreads are supporting a stronger market.

We are pleased that the strong earnings and balance sheet have allowed us for another quarterly dividend payout of $1.5 per share. And over the past year, the total dividend payment has reached $7 per share. All in all, our delivered results confirms TORM's strong operating model consistently performs better compared to our peers. Thus, our MR fleet has outperformed the peer average with $75 million over the past year. We attribute this One Torm platform and our dedicated -- we attribute this to our one TORM and our dedicated TORM employees.

And with that, we will let the operator open up for questions.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Jon Chappell of Evercore ISI. Your line is open.

[Jonathan Chappell, Evercore ISI]

Thank you. Good afternoon. Jacob, first question for you, two-parter. On the one hand, you said that you have liquidity and you're going to continue to focus on fleet expansion. On the other hand, you said publicly the newbuildings are too risky just given the uncertainty over the next 25 years. So the question is, what's the sweet spot for you as you look to further fleet expansion? Is it kind of the 10- to 12-year olds that you've been buying recently?

And secondly, you mentioned the order book is up to 10%. Is there a risk that people have or other owners have too much short-term focus, and that's what's driving the order book higher and aren't really focusing on the risk associated with fuel propulsion, et cetera, more than five years out.

[Jacob Meldgaard, CEO and Executive Director]

Thanks, Jon. Yes, good question. So number one, if we were to have the luxury of identifying assets that we think could be contributing positively to the platform, I think currently, yes, it's unchanged. It's vessels that are probably in the -- built, let's say, between 2010 and 2015 around that, that feels like the sweet spot for us. We think that the market will be strong for at least a number of years, and that would lead us in that direction.

If we then take your other point around the order book having grown, as I mentioned, yes, it is gross 10%. What is unusual. It's not so much that it's 10%, but it is that it's spread out over such a long period as I mentioned, annualized 2.8%. And I don't see here in the, let's say, initial three years that it's going to change from that. So really, we are looking at the investors or market players putting their money on [indiscernible] towards the end of 2026 to 2027. And let's see what happens. I think the shipyard capacity in general is going to be scarce commodity because there is less availability on the shipyard side. There has been restructuring, especially on Asian shipyards having gone down in their overall gross capacity. And at the same time, you are going to -- I think for the foreseeable future, you are going to see that shipyards tend to favor more infrastructure type of projects like LNG carriers that, for sure, is globally also needed sort of vehicle to provide gas into areas, for instance, in Europe where you have previously been dependent on gas from Russia.

So I think all in all, yes, I expect the order book to creep up, but I do expect it to be quite manageable when you consider what is happening then to the aging fleet here in the second half of the decade.

[Jonathan Chappell, Evercore ISI]

Okay. Thank you for that. [Multiple Speakers] Yes. My second question has to do with the next six months, much shorter time frame. It feels like everything is set up for another seasonal recovery, whether it's the inventory draws, the refineries opening, the IA's sequential growth in demand, another Northern Hemisphere winter on a continent where I think there's more risk to diesel supplies this year than last year. What can go wrong with the seasonal recovery this year? Is it strictly the economy? Is it something related to China? Where can we not have the type of seasonal uplift that we've seen in the last couple of years in the fourth quarter and into the early part of next year?

[Jacob Meldgaard, CEO and Executive Director]

Yes, that's a good question. I would probably look towards -- generally, I would look towards whether there is some danger on the crude side, the transportation of crude continues to be subdued that Aframaxes have been faring really, really well, as you can see also from the various results of companies engaged in there. And it feels as if right now, it is a standstill a little on the crude transportation in the medium-sized vessels in the Aframaxes.

If that continues, it would encourage people to try to penetrate the key market. So I think the jury is out on that over the next couple of months. I think that is one to watch. China, I'm not so concerned because it's a crude story. And right now, we're not really seeing a lot of the export of clean being available in the market for our type of vessels. That would actually be a tailwind.

I think China can almost not be, I want to say, supporting the product tanker market less than what they're doing now because there is very, very little exports. And I think that we are -- I think the potential for them opening up for more exports given where the economy is, is -- that seems like a more likely scenario than going the other direction. So that would not be a concern to me.

[Jonathan Chappell, Evercore ISI]

That’s good. Thank you for your thoughts, Jacob.

[Jacob Meldgaard, CEO and Executive Director]

Thank you. Thanks for the questions, Jon.

[Operator]

There are no further dial-in questions at this time. I will now turn the call back to Andreas for any online questions.

[Andreas Abildgaard-Hein, Head, IR]

Thank you. We have a few questions. First one is for you, Jacob. Do we see a considerable challenge of augmenting the supply adequately in the near future due to the contraction of shipyard capacities. Could you provide more detail on that?

[Jacob Meldgaard, CEO and Executive Director]

Yes, I think. That's a very good comment. We've already mentioned that more or less all capacity in the short to medium term have already been booked. What I would say, shipyards that are capable of delivering a product into the product tanker market. So that means that you are looking at either Tier 2 shipyards that could potentially maybe add a little to the order book, or you're looking at really long-dated contracts delivery back end of 2026 or into 2027.

So I think the restructuring sort of the shipyards seen is benefiting the product tankers because it was especially middle-sized Korean shipyards that 10 years ago were the big contributors to the order book. And those shipyards have either closed down or have turned their focus predominantly to other places. There's actually only very few shipyards left that are focused on product tankers, which is significantly different than if we turn the -- dial the clock back 10 years. So that's number one.

And number two is that there is a need, as I mentioned also, under the previous quota to still build infrastructure projects, which I personally think the LNG market has been, and there is a strong demand from both producers of gas in the Middle East and also the importers, for instance in Europe to actually get control of deliveries also in 2026, 2027. So I think there will be more contracting into the product tanker market, but the fact that there is basically less supply to go to, less opportunities of shipyards that can build it and that you are competing currently for the available capacity in sort of the high end of the shipbuilding market. That does give me some comfort to that we will see a rising order book but it's not going to be -- it can simply not explode in the medium term.

[Andreas Abildgaard-Hein, Head, IR]

Thank you. And we have a few questions I will combine here. But how do you look at consolidation in the current market environment? Are you currently looking at opportunities? And then also you have been in the market for selling some older vessels, 15 to 20 years, will you continue to sell in that age range?

[Jacob Meldgaard, CEO and Executive Director]

Yes. Okay. So they are very different questions, obviously. But if we take consolidation, the door is always open at Torm for consolidation. I think the fact is that we are doing really well. I can see that, of course, our peers in the market are also benefiting from these strong consol. So I think even though that I could, I would say, have an open invitation for consolidation, I can and I say that there is no active dialogue. And I think in the current environment that most investors are pretty happy with the positions that they have. That's my instinct. So I don't expect a lot of activity on that.

If you look at disposal, well, we are obviously utilizing our vessels for as long. We have the luxury in Torm that we've got a One Torm platform. So we are not discriminating against age. We are looking at what gives us over time the highest return on our invested capital and that includes vessels that are between 15 and 20. But if you look at it, then historically, I think the average age of assets that we have been selling are somewhere in the very high teens. So it seems logical that when and if we dispose of assets, it's in that age bracket. So I would expect over time that there will be further disposals of vessels in that age range. That seems totally plausible.

[Andreas Abildgaard-Hein, Head, IR]

Then we have one more question for you, Jacob. Are you mostly committed to spot markets and hedge with FFAs?

[Jacob Meldgaard, CEO and Executive Director]

Yes. That has been at least the way we have played the market since, let's say, first quarter of last year. When we saw the market have a step change, we think that there is value to be had in being open to the spot market with this high volatility. Just as an example, we're experiencing that exactly, let's say, two months ago, in the middle of June, the spot market for our MRs in the U.S. Gulf would be hovering around earning of 20,000. And today, as we speak, it's probably closer to 50,000. And I think to sort of close down that optionality of being able to also have these spikes in the market, I think we benefit as a company and our shareholders benefit from still being able to be open to that. And then we, from time to time, do hedge when and if we think that the value on FFAs is significantly close to where we think the market will be then we will utilize that.

Could we do [indiscernible] I think, clearly, if some of our clients, our top-tier clients came to us and requested tonnage for a longer period, of course, we are willing to do that at a price also.

[Andreas Abildgaard-Hein, Head, IR]

Thank you. And a question for you, Kim. Your staffing cost has increased significantly since one year ago. Is this something you can put some more details on? And do you expect the G&A to stay around at the current level?

[Kim Balle, CFO]

Thank you very much for that question. Well spotted if we take SG&A admin cost in general, that is one of the common KPIs we have across the One Torm platform. So every employee has that as a KPI meaning that we are in TORM super focused on maintaining stricter -- have a strict cost focus. So the underlying SG&A level is very much under control. We have key KPIs on it, and we want to maintain it more or less at the levels we've had for quite a while.

But as we published in conjunction with the January report, the Board of Directors have decided at that point in time that they wanted to grant an LTIP program for selected employees in TORM, a retention program running over 3.5 years. And when you have a program like that, you need to provision for that in your accounts, and we've done that over the 3.5 years.

So you will see that the SG&A is higher in the coming period, but it is noncash and it is a provision for that retention program, and that will expire in 2026. It is a one-off program so. But well spotted. Thank you very much.

[Andreas Abildgaard-Hein, Head, IR]

Yes. One more question for you, Jacob. There's a widespread conversation regarding challenges post 15 years, yet how substantial are the expenses associated with extending a ship's service life.

[Jacob Meldgaard, CEO and Executive Director]

Yes. So we are very comfortable with the calculations that we are doing. Obviously, we have a significant number of vessels in our fleet today that are over 15 years, and we also have experience with previous vessels having them operating efficiently in our fleet when they are over 15. So the way we see it is actually that it is quite dependent on the general maintenance of the individual vessel.

So I don't think you can like put a one-to-one and say on every vessel, it's going to be X or Y. But what we see is that in order to pass what is called the CAP 1 requirements when you are 15 years old, there is an extra associated cost, a CapEx of between $0.5 million to $1 million that can be dependent to that.

But of course, you are also extending the useful life towards the general market, the same market of a vessel that is below 15 years by doing it. And so far, we've been very pleased with the results that we get out of it on the One Torm platform. I don't think that it can be easily replicated. So I don't think that what I'm explaining here necessarily fits one-to-one with other operational platforms. But all in all, the NPV for us of making this additional investment at 15 years have made sense.

[Andreas Abildgaard-Hein, Head, IR]

Thank you very much. There are no further questions. So this concludes the earnings conference call regarding the results for the second quarter and first half year of 2023. Thank you for participating.

[Operator]

You may now all disconnect.