Torm PLC

CSE:TRMD A

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining TORM plc Fourth Quarter and Full Year 2022 Results Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

It's my pleasure and I would now like to turn the conference over to Mr. Andreas Abildgaard-Hein, Head of IR. Please go ahead, sir.

[Andreas Abildgaard-Hein, Head of Investor Relations]

Thank you. Welcome to TORM's conference call. We have been looking forward to presenting to you the results for the fourth quarter and full year 2022. We'll refer to the slides that we present during our presentation. And at the end of the presentation, you will get the possibility to ask questions. After this conference call, you will be able to listen to a recording of the call. And as usual, you can find our presentation 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. The results will, as usual, be presented by Executive Director and CEO, Jacob Meldgaard, and CFO, Kim Balle.

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

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

Thank you, Address, and good afternoon, good morning to all. Thank you for connecting with us today for our Q4 and full year 2022 presentation. The headline of today's call is that, the very strong product tanker markets have continued here into the fourth quarter of 2022 and that the underlying factors have also continued into 2023, no visible signs as of now as to when the market return. We have today presented the strongest results for the second quarter in a row. This means that we for the fourth quarter of 2022 achieved an EBITDA of $267 million and a profit before tax of $222 million. Our fourth quarter average TCE ended at $47,520 per day across the fleet and above $45,000 per day across our MR business. For the full year 2022 with our average TCE rate of $34,154 per day, we reached a total EBITDA of $743 million and a profit before tax of $557 million. With this, we ended with a return on invested capital of 29.2% for the year.

TORM's Board of Directors has approved a dividend of $2.59 per share based on the fourth quarter and we expect to distribute around $212 million in early April. This means that our total distributions for 2022 will end up at around $378 million. The distributions are in line with the distribution policy announced last year. After the end of the fourth quarter of 2022, we acquired seven LR1 tankers built between 2011 and 2013. As of today, two of the vessels have been delivered and the remaining vessels will be delivered before the end of April of this year.

However, we today entered into an agreement to purchase three 2013 built MR tankers for total cash consideration of $48.5 million. In combination with the issuance of 1.42 shares. We expect that these vessels will be delivered before the end of May, and with this, our fleet will reach a total of 88 [preferred] (ph) vessels.

Finally, we also announced that we have obtained loan commitment from a number of banks to refinance and extend maturity on existing loan and leasing agreements for up to $433 million. At the same time, we obtained commitment to finance additional second hand vessels for an amount of up to $123 million. With this refinancing that will take place during the second quarter of this year, we have obtained more attractive terms on our last part of our funding.

Here, please turn to Slide 5. Since the start of the Russian invasion of Ukraine in February 2022, we have seen strong improvements in product tanker rates. Increased trade flows, longer trade distances partly due to the EU sanctions on Russia and partly due to more fundamental factors such as oil demand recovery, recent refinery closures, and consequently increased import needs. This has all moved the product tanker fleet closer to the point of full utilization, which has also led to higher freight rates and where even small changes in the underlying demand and supply are creating high volatility in the freight rates as we have also experienced over the past 12 months.

Here, please turn to Slide 6. This rate volatility can be demonstrated by movements in average freight rates. But in the past 12 months, we have also seen increased rate volatility across the different regions, which, has in turn led to even more MR vessels that are ballasting over longer distances to optimize their release. These more efficient sailing patterns have tightened the availability of vessels on the market and further support freight rates. The irregular and suboptimal trading pattern is further emphasized by the fact that owners that are willing to do Russian traders are also willing to wait for these higher paying cargoes, which is, again, tightening the vessel availability.

In this environment of increased volatility being able to [indiscernible] towards the premium rates and regions is even more important and this means that having access to the right customers and right cargo combination is essential for earning optimal. We can see that we with our one TORM integrated platform, we are continuing to have strong support from our customers and we remain confident that we will have access to the cargoes and trades that is in turn enabling us to position our fleet towards the premium regions.

Slide 7, please. When we look more closely at the main market drivers, clearly the EU ban on Russian oil and oil products has been the most important demand driver in the past 12 months. We have been estimating that the EU ban on Russian oil products and the corresponding fuel trade recalibration will lead to at least 7% increase in ton-miles Europe needs to import clean oil products, especially [indiscernible] from sources, further field and similarly Russia needs to find new buyers for their products furtherly. And indeed this trade recalibration had started. The EU started to prepare for the ban already ahead of the final deadline of the February this year by importing higher volumes from non-Russian sources, especially the Middle East and India. At the same time, the EU countries continued to import high volumes from Russia basically until the very start of the ban. Higher import volumes added strongest ton miles, but also announced the EU countries to build up diesel inventories from multiyear lows.

With inventories back to normal levels, the EU import needs are currently lower compared to the high level seen at the end of last year. But these imports are coming from further fields and the inventories will need to be rebuilt again, increasing import demand over the coming months. Similarly, Russia has so far been quite successful in redirecting its clean products to market in North and West Africa, Turkey, the Middle East and lately also increasingly to Asia. Considering that around two-thirds of Russian fleet, petroleum products originate from the Baltic Seaport. These changes in export destinations have resulted in solid ton miles increases.

Kindly turn to Slide 8. Retail political tensions in Europe have no doubt been the main driver of the strong freight rate environment. However, fundamental drivers not directly related to the geopolitical situation in Europe, such as changes in the refinery landscape are also significant contributors. Since 2020, around 3 million barrels a day of refining capacity has been closed down permanently or is scheduled to be closed down during this year. Most of the affected is located in regions with the already large imports of refined oil for us with Australia, New Zealand, South Africa are some of the most prominent examples.

Just to give an example of the potential impact, refinery closures resulted in an almost 20% increase in clean petroleum imports to these three countries and contributors with a 2%age points increase in the global ton mile demand for product tankers. Given the fact that oil demand in these countries is still lacking behind the pre-COVID levels, we believe that the full effect of refinery closures is yet to be seen. On the other hand, these refinery closures coincide with more than 4 million barrels a day of new capacity coming online, mainly in the Middle East and China, regions that already today a larger exporters of oil products. Much of this capacity, especially from the Middle East, is currently ramping up and reaching full capacity this year and is to a large extent concentrated around middle distillers, which we believe will facilitate the trade recalibration triggered by the EU ban on Russian oil. Both these above mentioned developments are positive for tradeshows and ton miles in the coming year with only a few projects which are not positive for trade.

Please turn to Slide 9. The positive outlook for the demand for product tankers in the next two, three years coincides with the supply side, which is the most important theme for more than two decades. With record high new building prices and limited shipyard space, tanker ordering last year remained very low. Especially when considering the strength of the freight market. So by this year, we've seen some increased interest in newbuilding orders, although not all of this has materialized yet. However, at the shipyard buildup with other metal segments and continues to have a presence for these other segments only very few product tanker positions are available for end 2025 and in China, even the 2026 order book are also being rapidly filled up. This will effectively limit the fleet growth in the next two to three years.

Here, please turn to Slide 10. To conclude our remarks on the product tanker market, we see that the main demand and supply drivers on product tanker market continues to be very supportive. The trade recalibration changes in refinery landscape that already started last year will continue to support the market also this year. With the new large refineries ramping up in the Middle East being an important break in this bottle. We cannot disregard the fact that the current environment with high inflationary pressure on the global economy is likely to slow down the growth phase of the global oil demand. Nevertheless, we have the opinion that the effects of the redistribution of the energy supply chain will always the potential negative effects caused by slower demand growth.

As we also discussed, the process demand side is complemented by the supportive supply side situation, securing a low fleet growth for at least the next two, three years.

I'll now hand it over to my colleague, Kim, for further elaboration on our performance with coverage for the coming period our declared dividend and, of course, also the refined financing commitments.

[Kim Balle, Chief Financial Officer]

Thank you, Jacob. Please turn to Slide 11. We reported record high TCE rates in the third quarter of 2022, but we managed to obtain even higher rates. Average rates in the fourth quarter of 2022 increased our rates from $44,376 per day in Q3 to above $47,500 per day in the fourth quarter across the fleet. By the beginning of the year, rates have increased from an average of $16,743 per day, equaling an increase of 184% from the first to the fourth quarter. For MRs, the average rates for the fourth quarter ended at $45,029 per day for LR1s at $48,076 per day and for LR2 the average rates were $58,889. I'm very happy with the performance of the one TORM platform that once again demonstrated outperformance.

Please turn to Slide 12. Looking into the TCE rates we have obtained during the beginning of this year, we have seen that the strong markets are continuing. Tom has covered 90% of our first quarter 2023 tanker days at an average rate of $43,002 per day. And for the MRs in the first quarter, we as of the 30th of March fixed 89% at $37,730 per day and so far 86 of the LR1 tanker days were fixed at $44,135 per day and 90% of the LR2 days are fixed at $65,950. Also in the remaining quarters, we managed to fix rates at strong levels. As of 12th March, 80% of our days are fixed at $42,237 per day in the second quarter, 13% are fixed at $42,228 per day in the third quarter and 13% are fixed at $42,527 per day in the fourth quarter of this year. The main part of our coverage beyond the first quarter was made in the yellow ones and MR vessel classes remaining and also maintaining a high operational leverage in the LR2 vessel class.

Please turn to Slide 13. A strong TCE rate led to the highest EBITDA from our operations on record and our fourth quarter EBITDA of $267 million brought us to a full year of $743 million, which is more than the previous four years combined. As for 31st December 2022, the value of the 78 vessels in our fleet reached $2.65 billion, which is an average of more than 37% increase compared to the end of 2021 where we even have 85 vessels. The increasing freight rates that we saw in Q2 and Q3 of 2022 naturally led to increasing net working capital. The high but most stable rate environment from Q3 to Q4 results in a likewise, most stable development in our net working capital. Hence, the working capital development in the fourth quarter only had limited impact on the net cash generation and thus also the dividend declared based on our end Q4 2022 cash position.

During the fourth quarter of 2022, TORM's net loan to value decreased to the lowest level in recent years. Our net LTV decreased to 25% at the end of Q4 2022, coming from 52% at the end of 2021, which was largely driven by increase in vessel values, ordinary debt installments and our strong cash generation. If we take the declared dividend amount for Q4 of 2022 of around $212 million into account, the net loan to value would increase, would instead be 33%. Lastly, I can inform you that as for year-end TORM had low CapEx commitments of $18 million in total, which is mostly related to scrubber investments.

Please turn to Slide 14. As mentioned, we will distribute around $212 million or $2.59 per share based on our end of Q4 cash balance. Consistent with our distribution policy, our distribution is based on cash position of $324 million and working capital facilities of $93 million. We deduct restricted cash primarily related to financial instruments and cash in marine exhaust technologies of around $6 million. And finally, our EMR proceeds of $58 million. Our minimum cash reserve for 78 vessels was $140 million at the end of the fourth quarter. So in conclusion, it resulted in a payout ratio for Q4 of 2022 with a profit of $222 million of more than 95%. The total dividend distributed in relation to 2022 would thus be $378 million. We expect that the potential dividend payment in the next quarter will not be notably impacted by the acquisition of the seven LR1 vessels that we completed in January this year. Beyond finance part of the acquisition will thus be taken from our EMR proceeds. All other things being equal, this will leave our EMR proceeds of around $11.8 million at the end of Q1 2023.

Please turn to Slide 15. This morning, we announced that we have acquired three additional MR vessels. The vessels have fuel efficient eco vessel specifications and I expect it to be delivered no later than 31st May 2023. We will pay for the transaction with 50% cash and 50% shares that will be issued in conjunction with the delivery of the vessels. The cash element of the transaction is expected to be financed through traditional bank financing. Also today, we have obtained commitment for the refinancing of $433 million bank and leasing agreements with two new bank facilities, thereby extending debt maturities until mid-2028 and with the possibility to extend most of the debt expiration to mid-2029.

Further, we have obtained commitment for financing of additional secondhand visits for up to $123 million with the same expiration terms. The refinancing or the refinanced debt will be structured as a syndicated facilities agreement is set into with six to nine banks of up to $322 million that will refinance 21 vessels built between 2009 and 2020 and a bilateral facilities agreement of up to $111 million that will be -- that will refinance 26 vessels built in 2003 to 2008.

Looking at our repayment profile, we will increase repayments in 2023 and 2024 slightly, thereby deleveraging more than under the existing loan agreements in the first years. In addition to extending maturity, we have obtained attractive terms on this new financing agreement. The closing of the agreement is subject to documentation and is expected during the second quarter this year. We are very pleased with the support from our existing relationship banks and our new banks. To them, we are confident that we will have set the group of banks that for the years to come can assist us in growing TORM's business. During the fall of 20 22, TORM was in compliance with all financial covenants.

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

[Operator]

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] We have the first question from Jon Chappell from Evercore. Please go ahead, sir.

[Jon Chappell, Evercore]

Thank you. Good afternoon. Jacob, two somewhat obvious strategic questions for you this afternoon. I like the Slide 12 that you put in on the 2023 coverage and it feels like it's pretty balanced on the LR1, but clearly with your optimism on the market, keeping a lot of spot exposure on the core LR2 and MR, which make sense. At a certain point, do you expect to lock in some of the longer term, maybe one or three contracts that are out there? And maybe as part of that question, can you speak to the liquidity of that market and how representative it is of the current spot rate environment?

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

Yes. Thanks for that question, Jon [indiscernible] So we've had the same I think conversation over the last couple of quarters, what would be sort of the time when you start to take color a bit deeper. Clearly, we would be more inclined to look at it today than in the last quarter. Rates on, let's say, on an LR2, just an example, have gone from three years being sort of in the mid high 30s to probably around 40 now. So given that you -- in the meantime, as you can see, have had the benefit of a strong spot market. It's of course encouraging that the long end of the market is creeping up at the same time as more time had passed on your asset at rates that are above that. But I don't have a precise idea about what it is that we would look at. But of course, it's a better return today than having done it three months ago.

[Jon Chappell, Evercore]

Okay. The other one is, I'm sure you're getting great returns on the secondhand vessels, you are buying the seven LR1s and the three MRs that you just announced today. But a little curious that the market seems incredibly strong from an asset value perspective, especially for ships of that age. So you're still up there buying ton of liquidity to do so. Why haven't we seen kind of the greater unwinding of some of the older tonnage in the fleet? So kind of a one for one sets achieving a 10 year old or maybe a 15 year old and taking advantage of the strong secondary market for those older ships?

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

Yes. We actually did do that in a way. I mean, we sold, I think, eight assets [indiscernible] over the course of last year. So that movement is more or less already baked in. But we are constantly evaluating as you point to what is the right balance for us around maintaining vessels or selling off. We are quite comfortable in ordering our fleet right now, to be honest. And we don't see a big price differential between older tonnage and newer tonnage in -- when we operate in the spot market. So therefore, for now, I don't have a particular sort of circle going offloading more tonnage. But of course, we may decide to sell slightly all of this if the price is right.

[Jon Chappell, Evercore]

Okay. Thanks for the answer, Jacob.

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

You're welcome.

[Operator]

[Operator Instructions] We have the next question from [Peter Halgan] (ph) from ABG. Please go ahead, sir.

[Unidentified Participant]

Good afternoon, guys. And sort of I think continuing on the former question. And I wanted to ask you what to think about the new building opportunities out there now and to what extent TORM would be contemplating to not only add secondhand tonnage, but also newbuildings to its fleets.

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

So we confirm, as you can see, vessels that are on the water now. I mean, this is a cyclical industry and it can be quite volatile over the years. So for now, our preference is for tonnage where we can, I'm going to say, see at least the immediate future. If you then look at, let's say, 2026 delivery, I think if we were to think about it, it would be to be investments that are difficult to get to by virtue of buying the assets today. And my strong preference is for assets today, I think it would have to be really something special. On price or special on features, capability on an asset that has a long dated delivery.

[Unidentified Participant]

Okay. Well, thanks for that. The sort of the obvious question here is that, at some point someone needs to build more ships, these ships, as we all know, deteriorates by the day. And at least one needs some sort of replacement for outgoing tonnage. But I guess then the question, how do you suspect the continuation or what do you expect the order book to fleet ratio to stand at if sort of your billion dollars for 2023 comes through, will we see more ordering do you think through 2023 if markets all hoped up as most of us expect?

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

I think it is that is [indiscernible] that you will have more ordering, more contracting in 2023 than what you had in 2022. Significant people are also going longer dated. I think in 2022, people were probably more reluctant to buy, let's say, a 2025, 2026 position today. There's not much capacity as we discussed. So I think the contracting itself will probably be bigger. But what you will -- what I expect is that, it will not at least in 2025, 2026 climb above sort of this 3% 4% that we've been concentrating. And then, of course, when you get into the second half of this decade, what is interesting is to look at the 25 year old sort of scrapping potential is increasing dramatically once you get out there. As I'm sure you've also looked at it Peter.

[Unidentified Participant]

Oh, yes. And that's a point here. I'm very curious to see how –

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

The way we think about it is that, we actually did spend time in China and in Korea a little earlier this year when it was opened up, and we sort of -- we have our own view on what is the realistic availability of the shipyard capacity in 2025, 2026, 2027. And we model it here as if all of that will be filled and when we get that, that's the extreme case, that's where these shipyards do not get attracted by dry cargo or container or LNG or other segments. And in that scenario, there is still a very manageable order book that you get to.

This is all -- it's quite dynamic obviously. And it is outside of our two to three year discussion that we've just had. I think that it is totally plausible that the fleet -- additional fleet will be subdued at least up to and including 2026. And then when you get past that point, the fleet that needs to go to recycling is increasing dramatically. That's why we like that on the water now because we think that there is -- now having 88 vessels on the water now, I think it's better and let's say having whatever 60 now and 20 out in the future.

[Unidentified Participant]

Understood, understood and agreed. The final question from my side, the ship per share transaction you just did now. Should we expect more of that for the next quarters?

[Jacob Meldgaard, Chief Executive Officer & Executive Director]

To be honest, we are quite positive around utilizing our equity at past payment. We think it's good for the -- in this case for the new shareholders. I think they get on board with significant upside potential for them and for us we are growing the company without losing the strength of the potential to have the same payout ratios as we've just discussed. So, yes, if and when these opportunities arise, we would be willing to entertain that.

[Unidentified Participant]

Thank you, Jacob. Thank you. That's all for me.

[Operator]

There are no further questions from the phone, and I hand back to Mr. Hein for the web questions.

[Andreas Abildgaard-Hein, Head of Investor Relations]

Thank you. We have no further questions on the web. So this concludes the earnings conference call regarding the results for the fourth quarter and full year 2022. Thank you for participating.

[Operator]

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.