Torm PLC

CSE:TRMD A

Earnings Call Analysis

TORM Reports Strong Q2 2024 Results Amid Market Volatility

TORM has achieved robust financial results for Q2 2024, with time charter equivalent earnings increasing to $326 million and EBITDA reaching $251 million. Net profit stood at $194 million. The company declared a dividend of $2.8 per share. TORM expanded its fleet by acquiring 8 secondhand vessels for $340 million while divesting older ones. Despite geopolitical tensions impacting trade routes, leading to longer voyages, the demand for product tankers remained strong. The company narrowed its 2024 EBITDA guidance to $850-$1,050 million and TCE earnings to $1.15-$1.35 billion, reflecting optimistic future prospects.

Strong Financial Performance amidst Geopolitical Tensions

In the second quarter of 2024, TORM showcased robust financial results, achieving time charter equivalent (TCE) earnings of USD 326 million and an EBITDA of USD 251 million. This marks a substantial increase, approximately 30% year-on-year, primarily driven by high freight rates and a greater share of LR2 vessels in the fleet. Despite some retreat in spot rates towards the end of the quarter, the average fleet-wide TCE rate rose by approximately $5,700 compared to Q2 2023, reflecting heightened demand and favorable market dynamics stemming from geopolitical tensions, particularly due to the ongoing conflicts in Ukraine and the Middle East.

Market Dynamics and Geopolitical Influences

The geopolitical unrest has reshaped product tanker trade routes, progressively increasing voyage distances and contributing to a tighter supply-demand balance in the tanker market. Notably, trade volumes for refined oil products rose by 2% year-on-year, supported by increased oil demand. However, the geopolitical situation has led to a dramatic shift, with a significant portion of clean petroleum trade being re-routed, causing a decline in the share transiting through critical chokepoints such as the Suez Canal.

Fleet Expansion and Strategic Acquisitions

In alignment with its growth strategy, TORM has actively expanded and refreshed its fleet. The company recently finalized the acquisition of eight MR vessels, scheduled for delivery in late 2024, with a total consideration of USD 340 million. Additionally, TORM is divesting older vessels (such as a 2006-built MR tanker) for USD 23.3 million, thereby balancing its investments with efficiency and fleet age considerations. The operation of these acquisitions is structured through share-based financing, which is indicative of their commitment to maintaining a conservative financial leverage.

Stable Dividend Payments Reinforcing Shareholder Value

TORM continues to prioritize shareholder returns, declaring a dividend of USD 1.8 per share for the quarter. This dividend demonstrates a string of positive distributions, reflecting the strong cash flow generation and effective management of the company’s earnings. The Board’s approach remains rooted in a formulaic policy, focusing on net cash generation for dividend distributions, providing substantial income for shareholders.

Positive Guidance for Future Earnings

Looking ahead, TORM has revised its guidance for total TCE earnings for the year 2024 to a range of USD 1.15 billion to USD 1.35 billion, and EBITDA expectations are now set between USD 850 million and USD 1.05 billion. This reflects not only an optimistic view of ongoing market conditions but also suggests that TORM remains well-positioned to capitalize on potential profits amid fluctuating industry dynamics, covering approximately 68% of expected earnings days at a fleet-wide rate of $42.25 per day.

Market Considerations and Potential Risks

While the outlook is largely positive, concerns about macroeconomic factors, particularly related to Chinese demand and potential refinery run cuts, should be considered. Analysts anticipate that any slowdown in demand could impact TORM's market position, especially as oil prices and demand fluctuate due to changes in consumer behavior and geopolitical events. Therefore, TORM's ability to maneuver through these market uncertainties will be crucial for maintaining its growth trajectory.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the TORM First 6 Months and Second Quarter 2024 Results Call. Please note that today's call is being recorded. [Operator Instructions].

I will now turn the call over to Jacob Meldgaard, CEO. Please go ahead, sir.

[Jacob Meldgaard, executive]

Thank you, and thank you, everybody, for joining us on this call today. This morning, we released our company announcement with the results for the second quarter of the year, and I'm pleased to report that, again, this quarter, TORM has achieved a strong financial performance.

Our time charter equivalent earnings increased to USD 326 million, and EBITDA improved to USD 251 million as freight rates remained firm throughout most of the quarter. Again, we had witnessed a continuation of the market dynamics that we've seen in the previous quarters, i.e., geopolitical tension stemming from both the Ukraine and Russian conflict and the escalating confrontations in the Middle East that leads to rerouting of vessels, longer voyages and higher ton-mile demand. This, of course, adds to an already tight supply-demand bands in the product tanker market.

We remain optimistic about the prospects for the coming years as we believe that the supportive fundamentals for the positive rate environment is likely to stay intact. Thus, we expect longer ton-mile, higher utilization rates in the years to come and, at the same time, manageable newbuilding deliveries.

Consequently, and in line with what you have seen in previous quarters. In early July, we entered into an agreement to acquire additional secondhand vessels. This time, 8 MR vessels to be delivered during the second half of this year for a total consideration of USD 340 million. The vessels have all been built at Hyundai Mipo Dockyard in 2014, 2015, and 6 of the vessels have been fitted with scrubbers.

And then as you would expect us to do when our vessels reach a certain age, we had divested one 2006 built MR tanker for delivery in the third quarter 2024, for cast consideration of USD 23.3 million. Thus, adding it all together, we are both expanding and replenishing our fleet. And as we've done for some time now, we are using our partner share-based structure to finance the transaction.

By continuing this way forward, we believe that TORM will be in a strong position to further add to our value creation over the coming years. All in all, this has been a very satisfactory quarter and in line with our intention of distributing the cash flow net of debt repayment, TORM has declared a dividend for the quarter of USD 1.8 per share. Thus, adding to the positive dividend got seen over the recent quarters.

And, now please turn to Slide 5. In the past 2.5 years, geopolitical tensions first in Europe, then in the Middle East have led to the product tanker rates increasing to a new higher average level. At the same time, we are also seeing increased volatility in rates as the fleet utilization has moved closer to full utilization.

Please turn to Slide 8.The main impact of these geopolitical tensions has been a reshaped product tanker trade towards longer distances. All while overall trade volumes have risen, supported by increasing oil demand and changes in refinery landscape. The EU sanctions against Russia in 2023 led to a trade rerouting towards longer haul trade both for European imports, but also for Russian exports.

This year, the product tanker market has been strongly affected by the Houthi attacks against commercial vessels at the Bab el-Mandeb Strait. The share of global clean petroleum products trade transiting the Suez Canal has declined from 12% to only 4%, meaning 8% of the global trade has been redirected. The majority of this is going a longer route around the Cape of Good Hope.

While the Middle East situation is very dynamic, the recent escalation of the conflict between Iran and Israel suggests that the time line for disruption continues to be drawn out.

Now please turn to Slide 7 for a closer look at the market development here in the second quarter of the year. In the second quarter of the year, trade volumes with refined oil products increased by 2% compared to the same quarter last year, supported by higher oil demand and recent changes in the refinery landscape. Together with the longer trading businesses, this has led to an overall increase in ton-mile demand for product tankers.

At the same time, earnings for larger crude tankers have been subdued both seasonally, but also given the fact that VLCCs have not directly benefited from geopolitical drivers. This has led to a cleanup of a number of VLCCs and Suezmaxes since the end of the second quarter. However, as we move towards the fourth quarter, TORM expects a seasonally improving crude tanker market to significantly reduce incentives for crude cannibalization. At the same time, as both seasonality and volatility with continued market disruptions will keep clean trade distances longer.

Please turn to Slide 8. When we combine the tonnage demand and supply drivers, our calculations show that the product tanker demand supply balance has stayed on a much firmer footing than before the geopolitical tension started. After an 8% increase in ton miles last year, the Red Sea disruption together with organic growth in trade volumes, has so far this year added around 10% to ton-mile. This has been front-loaded, but actually [indiscernible] than what we had forecasted. What is important to mention here is that ton-mile has grown significantly also on trades not directly related to the Red Sea disruption. At the same time, net fleet growth has been much more limited. The cleanups of both LR2s as well as large crude [ tanker ] has increased the supply of tonnage. But even with this, the supply growth has been much more limited than the growth in ton miles.

Please turn to Slide 9. The product tanker ordering shipyards has picked up after years of subdued newbuilding activity. Currently, the order book stands at 19% of the fleet. As we have pointed out earlier, newbuilding activity has largely concentrated around the LR2 segment. 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 17%, which is equal to the share of the combined fleet being candidate to recycling. Furthermore, it's important to mention that the current order book is spread over 4 years and with the increasing average delivery time, vessels order today will most likely not be delivered before 2028.

And now kindly turn to the next slide, turn to Slide 10. When we look further ahead in time, we now expect the potential additional order bring off the product tankers from 2028 onwards to be lower than our previous forecast. This is predominantly due to Chinese shipyards opting to build container vessels, LNG carriers and other vessel segments where China has strategic import interest. This coincides with a period where an increasing share of the fleet reaches a natural scrapping age. Should a strong freight marking result in less-than-expected scrapping activity, we still expect older vessels to leave the mainstream market and go into sanctions or [indiscernible] strait..

Please turn to Slide 11. Lastly, behind the geopolitical factors that have reshaped refined product [ interstate, ] there is a refining industry influx. In recent years, new refining capacity has been added in net exporting regions such as the Middle East. On the other hand, a number of refineries have been closed in net importing regions, for instance, Europe and Australia. This has led to higher trade volumes and higher demand for product tankers. Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling utilization rates in mature demand regions raises the likelihood of further capacity closures before the end of the decade. Here, especially Europe stands out with older, relatively small and less complex refineries that are more open to international trade than in other regions. A new wave of refinery closures is likely to again increase trade with refined products.

Now, with these comments, I conclude my part of the presentation. I'll hand it over to my colleague, Kim, who will walk us through the financials.

[Kim Balle, executive]

Thank you, Jacob. Now please turn to Slide 12 for the financial highlights. In the second quarter of the year, our time charter equivalent earnings increased to USD 326 million. And based on this, we achieved USD 251 million in EBITDA and USD 194 million in net profit. When we adjust for the unrealized gains on derivatives in Q2 2023, the operating result is around 30% year-on-year, up around 30% year-on-year, driven by both the freight rate environment and increased relative share of LR2s in our fleet. Some [ achieved ] fleet-wide TCE rate of more than $42,000 per day with LR2s close to $52,000 per day, LR1s at more than $42,000 and MRs at more than $38,000.

It should be noted that spot rates were at a relatively high level in the first part of the quarter, followed by some retreating towards the end of the quarter as season resulting started.

Our fleet had a total of 7,749 earning days, i.e., a little higher than the 7,451 days we had in the same quarter last year. However, as previously mentioned, with LR2s accounting for a relatively higher part of the total compared to last year, we believe these are strong numbers and all together, they reflect a very satisfactory performance, enabling us to realize TCE rates per day that have increased by $5,700 compared to Q2 2023.

Further, the results that we have produced translate into a return on invested capital of 29.5%, thus underscoring the positive environment in which we are operating. And as highlighted previously, you should expect us to maintain a stable and conservative financial leverage also in periods where we are increasing our operational leverage as we are using our shares as part of the consideration in connection with acquisitions of business.

Again, this quarter, our business is generating significant profit and cash flow. And again, we remain firmly committed to returning a significant part of our earnings to our shareholders.

Slide 13, please. The chart in the overlift illustrates how vessel values have increased over the previous quarters, leading to a total value of USD 3.7 billion and net asset value showing a similar progression, reflecting higher broker valuations of the business as well as an increased fleet.

Also on this slide, we show in the chart in the lower left corner that [ value ] in our net interest-bearing debt, which now amounts to USD 737 million, [ plus ] USD 157 million lower than a year ago, as we have increased our cash position somewhat and thereby more than offset an increase in our gross debt.

Based on this, we currently stand at a net loan-to-value ratio of 20.4%. However, when subtracting the declared dividend for Q2, then it will be around 25%, but continuing the quarter-by-quarter decline in financial leverage.

Slide 14, please. On this slide, we have made an overview of per share development in recent quarters result, we announced today translate into an EPS of $2.08, significantly higher than the same quarter last year. Share count has increased by 10 million shares over the period since last year, driven by our partly share-based transactions and is up from [ 84.9% to 94.9% ] over the same period.

Based on our strong earnings, the Board of Directors has declared a Q2 2024 dividend of $2.8 per share, thus offering the dividend by $0.30 per share compared to same quarter last year.

And now please turn to Slide 15. This slide gives you the full overview of the dividend distribution and the key dates to observe. It's dividend date for the shares on NASDAQ Copenhagen will be on 28th August and further shares on NASDAQ, New York on 29th August as shares are [ now trading T+1 ] in New York, but otherwise, the same process as usual.

I'll now turn to Slide 16 for the outlook. Based on the satisfactory results we have published today and the coverage we have for the third quarter of 2024, we increased the low end of our guidance range with USD 50 million and thereby narrowing the guidance range reflecting the increased transparency on full year numbers. Thus, we expect TCE earnings for 2024 of USD 1.15 billion to USD 1.35 billion and EBITDA of USD 850 million to USD 1,050 million.

The [ trade ] shows that we in the third quarter of 2024 expected to have 7,859 earning days and as of 12th August 2024, we had faced a total of 64% of those [indiscernible] rate of USD 38,340 per day. Further, for the full year, we are now at 68% coverage at a fleet-wide rate of $42.25.

And with this, I conclude my part of the presentation, and I will hand it back to the operator, who will take care of the Q&A session.

[Operator]

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

[Jonathan Chappell, analyst]

Jacob, I hate to start with a big macro one. Seasonality makes complete sense. We've seen in many years. I think your chart that explained the crude and product was very interesting. But there is a little bit more, I think, macro uncertainty today. We've seen some softer numbers out of China. I think there's more concern about the consumer in general, IEA estimates for growth coming down.

Your third quarter bookings have been good so far. But do you think that some of the weakness in August could be more than just seasonality and a little bit more cyclical headwinds as we think about how we come out of the summer and into the stronger winter.

[Jacob Meldgaard, executive]

Yes. Thanks, Jon. Yes, certainly, that could be a scenario. If I look back then it was exactly the same last year. We were experiencing if you plug in your data points, if you plug July, August, September last year, we saw exactly the same erosion in rates. So yes, it could be that it's not seasonality and it's something more fundamental. I don't think that there is something that really points to that at this stage. But clearly, that would be a risk for our market. But that's not -- that's the risk that we are having all the time. When I look at it, sort of, if we take a step a [ nutshop ] and I think that all consumption globally and sort of what we thought would be a potential risk, let's say, a couple of years or 3 or 4 years ago, which would be a transformation of the underlying economies away, aggressively away from fossil fuels, I think that has -- that's not what I'm looking at right now.

So there will be seasonality, and there will be bumps, but sort of in the broad view, I don't think this is a sign of this. And then looking back, as I say, 2023, the numbers, it was exactly the same price mechanism in [ MR ].

[Jonathan Chappell, analyst]

Okay. And if we tie that together with now the fleet reaching 96 vessels, which is, I think, by anyone's estimation, certainly critical mass gives you some optionality and flexibility with the fleet. If I go back and look at 7% ton-mile benefit from Russia, 6% from Red Sea, certainly seems like these issues have probably more duration than anyone would have anticipated when they first began. But given that great impact, given now 96 vessels, given maybe some of the macro concerns, is there a desire or maybe are you looking at a little bit more a little bit more balance in the fleet because it does feel like the contract market has been far more steady and substantially more elevated than the weakness in the spot market we've seen recently.

[Jacob Meldgaard, executive]

No. Clearly, the markets are, I would say, not reflecting that there is this bump [ speed bump ] you could say, currently. I think we are going to take it really opportunistically. Currently, we are of the expectation that this is a seasonality, and it will come back. I think that's the time to actually make those calls rather than in the current environment.

[Operator]

Our next question comes from the line of Omar Nokta with Jefferies.

[Omar Nokta, analyst]

I am -- obviously, nice earnings as usual. And I wanted to maybe piggyback a little bit on Jon's first question. Obviously, we're in a very strong market. Things have clearly cooled off a bit. They remain elevated, definitely from a historical perspective. I guess there's been some talk of refinery run cuts in Asia. And I just wanted to get a sense from you if do you feel like the spot market or the charter markets as they are today are reflecting that already.

And then do you see risk are you seeing signs that refinery run cuts will be coming into the Western Hemisphere as well?

[Jacob Meldgaard, executive]

So when we look at then actually, I think we are starting to see the activity with our clients in Asia is actually coming back from the lows that we saw maybe a couple of weeks. It is on the backlog of the China demand have been slow, as you pointed to, slower VLCC movements and also that product, how do I say, flow internally in China, has been relatively slow, of course, leading to that you are not calling on more crude into your facility. But it may actually lead to being a beneficiary that the product tanker market will have is that China is still running at a rate that is higher than what their local consumption would be and that you could see that there will be additional export quotas likely to be provided. So let's see. It's a political decision. But I think sort of it's stacking up against that we will see more exports out of the region rather than less exports out of the region in the coming months.

[Omar Nokta, analyst]

Okay. So it sounds like effectively then the market has been reflecting this for some time. A couple of questions, just to follow up a bit more on TORM specifically. This is perhaps an easy one that I think you probably have answered in the past, but just wanted an update. You mentioned that the 68 scrubbers that are installed on your fleet of the 85 plan. I guess is the plan still to move forward with those remaining installations. And would you do those, I guess, as part of your ordinary dry dock of those ships?

[Jacob Meldgaard, executive]

Yes. So our plan is currently intact, and it will be as you say, also done in the ordinary course of the business. That's a mix of some of the acquisitions we've done over the last couple of years where it makes still financial sense. Of course, we will do it case by case and to look at what we deem to be the net present value of making the investment, the time is actually not so relevant because we're doing it during the ordinary course. But of course, installation itself is costly, and we do take it case by case and look at whether the installation makes sense. For now, our plan is to go ahead.

[Omar Nokta, analyst]

Okay. Great. And then just a final one just regarding the dividend. I think this one, it's 87% of earnings this last $1.80. I guess just in terms of the policy, how should we think about it in terms of it being formulaic. And I know you get this question a lot, but is the dividend quarterly? Is it still formulaic in regards to basically paying out excess cash that's above the reserve? Or has it become a bit more discretionary by the Board?

[Kim Balle, executive]

Yes, it is -- it's always been up to the Board for the fleet discretion at the end of the day. But the way we sort of think about it is, as you're saying, -- and I think we should all think about like whatever we earn or we generate up liquidity from end of the quarter or start of the quarter, end of the quarter, that is basically what we sort of have the ability or anticipate to pay out as dividends or distribution. So it's the same thinking. But of course, if the Board deems the management that we should sort of have another calibration of the final dividend, we could do that. But at the outset, it's the same way we are thinking. We just take the net cash generation per quarter, and then we -- that's the outset for us that we will distribute that. We have not changed it per se over the course the last many quarters.

[Operator]

Our next question comes the line of [ Clement Mollins with Value Investor's Edge. ]

[Unknown Analyst]

I wanted to follow up on Omar's question on Chinese demand. I mean diesel demand has been fairly weak year-to-date as some track shift to LNG, and on the other hand, as EV adoption in the region increases, that could also weigh on gasoline demand. Could you provide some commentary on when do you expect gasoline and diesel demand in the region to plateau? And secondly, do you believe China's infrastructure is able to support continued LNG NAV adoption.

[Jacob Meldgaard, executive]

Okay. Thanks for those questions. I think I'll start with Chinese demand for products. Well, -- of course, there is, as you point to, a number of factors that is impacting how is the Chinese infrastructure sort of developing both on EV adoption of that and also consumption of diesel and gasoline on the other side of the accretion. We see that Chinese demand is going down, but that is obviously not necessarily bad for product tanker floats. So we are more concerned [ not some about ] the internal distribution of energy sources in the Chinese ecosystem, but rather what is the impact on trade flows in or out of the refineries.

And there, everything has been equal, we don't see that there is a threat from the EV adoption from how the sort of infrastructure issues that may or may not be there to build that further that, that is having a negative impact on the product tanker market as such.

[Operator]

Our next question comes from the line of Petter Haugen with ABG.

[Petter Haugen, analyst]

Two questions from my side. In terms of the TCE market these days, would you consider doing something longer on current levels? I'm reading is, well, just shy of $30,000 for MRs for 3 years or a little bit more than $40,000 per day for LR2s? Are those levels attractive, you think, for 3-year chartering activities now?

[Jacob Meldgaard, executive]

Yes, I think you're right on -- we did do that, Petter, during the quarter [indiscernible] and LR2 for 3 years with one of our clients in the low mid $40,000. So yes, we would look at that as it depend on the trade and our clients, that is a market that we are constantly evaluating and that we also did this call, yes.

[Petter Haugen, analyst]

Okay. Understood. And in terms of the volumes [ done, ] would you sort of consider doing a larger share of your fleet to mark in those rates? Or are you happy to describe the [indiscernible].

[Jacob Meldgaard, executive]

We're happy either way. So obviously, we are believers in the market will offer good rewards, good risk return when you are stuck and also from part of it, we will also happily engage with our clients. So I don't think it is an either or also given the number of assets that we've got that I think we can play both sides, Petter, on that. But the current levels are, in our opinion, attractive enough to also engage in, yes.

[Petter Haugen, analyst]

Okay. And a second question for ourself. In terms of your presentation in Slide 8, you're here showing, well, approximately 8 million [ deadweight ton, ] if I read it correctly, of crude tankers or LR2s and crude tankers moving into the product tanker fleet. Is this to be understood as your expectation for full year? Or does this imply that you'll have some sort of reduction from what we now here are, well, even VLCCs are doing clean trade [indiscernible] these days.

[Jacob Meldgaard, executive]

Thank you, Petter. That's a good observation, -- good question. So this is here and now. This is what we see the portion of crude tankers that have migrated and you can say, [indiscernible] cannibalized on the product tanker fleet. So this is not our estimation of where we will end the year. We do expect that a significant ratio of these vessels will go back into the trade once you see a seasonal pickup also in the VLCC and in the Suezmax trade.

So this is here now what we can identify as business that are carrying key petroleum products as we speak.

[Petter Haugen, analyst]

And just as a quick follow-up on that, speaking for myself, I was pretty surprised when I heard about all those VLCC in particular, trading clean. And to some extent, it makes me somewhat worry about both the product rate, of course, because the crude tanker fleet is larger. And if all of them are capable of coming and cannibalizing your market? I would think about that as [indiscernible]. But to what extent have you been surprised to see the migrations coming into your part of the market over the past couple of months?

[Jacob Meldgaard, executive]

Yes. So for us, it is not surprising if the market is offering you say, let's say, pick your number, $20,000, $25,000 per day for a [ V ] and that you can in a way, say 2 -- LR2 [indiscernible] LR2s are trading at 50 and that you can then optimize your earnings on the V-2, let's say, 40 -- that makes sense if I review. But if the market for an LR2 is 30, and I'm getting 25 on V, you're not going to do to LR2 sense, because it's simply not economically feasible. So there was a window where the lease were where you could say the gap between what [ V ] were making and what are LR made that incentive. I don't think it is incentive even today to do it because you are alternative from going after the V market is not attractive right now.

So I think what it demonstrates is that crude and product is not 2 separate markets. And obviously, if you have no [ V ] market we will try to cannibalize on CPPs if those rates are so I think that's just a -- I think it's more that there is a -- you cannot have a differential, let's say, of 3x LR2s because [indiscernible] it will be attractive to do 2 LR2s [indiscernible] and you get a higher TCE. Does that make sense? So that you can say that [indiscernible] and LR2 rate can go on its own over time. That doesn't make sense.

[Petter Haugen, analyst]

Yes.

[Jacob Meldgaard, executive]

[ V ] is trading at 50%. Well, then as could -- I'm not -- I'm saying a little tonnage, but then they could be double. Without making it into [indiscernible]

[Petter Haugen, analyst]

Yes. Yes. Thank you fully understood and agreed to. I was more speaking to the technical complications of actually cleaning up those tankers. I thought it was closely impossible to see those ever trading or be accepted the cargo owners to actually trade fleet. But fully agreed understood in terms of economic incentives, yes.

[Operator]

We have no further questions at this time. I will now turn the call back to Jacob Meldgaard for closing remarks.

[Jacob Meldgaard, executive]

Okay. Thank you very much for dialing in to the second quarter 2024. Have a great day.

[Operator]

Have a great day. This concludes today's conference call. Thank you all for your participation. You may now disconnect.