Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining TORM plc six months ended and second quarter 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. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Andreas Abildgaard-Hein, Head of Investor Relations. Please go ahead.
Thank you for dialing in, and welcome to TORM's conference call regarding the results for the second quarter and first half year of 2022. My name is Andreas Abildgaard-Hein, and I'm heading Investor Relations in TORM. As usual, we will refer to the slides as we speak, and at the end of the presentation, we will open up for questions. Please turn to slide two. Before commencing, I would like to draw your attention to the safe harbor statement. Please turn to slide three. The results will be presented by Executive Director and CEO Jacob Meldgaard and CFO Kim Balle. Please turn to slide four. I will now hand the call over to Jacob.
Thank you a lot, Andreas, and good afternoon, and thank you all for dialing in. It's truly a pleasure for me to be here today. We've published our results for the second quarter of 2022, and here, let's get into it. We achieved an EBITDA of $153 million, and this is equivalent to a profit before tax of $107 million. The TCE across the fleet ended just shy of $30,000 at $29,622 per day. Here, as per the 14th of August, so that's last Friday, we have then fixed 2/3 of the open days here in the third quarter of 2022 at even higher rates at $45,462 per day.
Here, after the end of the second quarter of 2022, we purchased 75% of the shares in Marine Exhaust Technology A/S, which owns ME Production. ME Production, they produce solutions to reduce air pollutants in connection with marine transportation. TORM, we have had an extensive historical relationship with ME Production, including joint ownership of a scrubber production facility. Now, by purchasing our majority part of ME Production, we are acquiring 70 people with R&D and with production capabilities. Here, as we see it in a world of ongoing supply disruption, the acquisition will help us to timely secure the sourcing of the important equipment there that is needed for further optimization of our fleet.
During last quarter, we announced that we changed our distribution policy, and today I'm pleased to announce that TORM's board of directors has approved a dividend of $0.58 per share, and the distribution amount will be around $47 million, and this is in line with this new distribution policy. Lastly here, in the introduction, I'd like to put some focus on TORM's ability to utilize now the strong secondhand prices to also divest and for us sell off the older vessels in our fleet. These vessels have been sold from the back end of last year until the end of the second quarter of this year, and they had an average age of 18 years, and this added $62.8 million of liquidity after debt repayment.
Further, after the end of the second quarter this year, TORM has decided to order an additional eight scrubbers for our fleet. That means that we will be reaching a total of 68 scrubbers when this scrubber investment program is complete. Please turn to slide five. Now, since the start of the Russian invasion of Ukraine back in February this year, we've seen a strong improvement in the underlying product tanker rates. Here, in fact, in the second quarter of 2022, the quarterly rates earned by our MRs were the highest since the fourth quarter of 2005. The political situation has added great volatility to the market, but every time the rates have fallen back from peaks, the new lows are higher than the levels that we saw earlier, indicating an underlying strong upward trend.
Although the geopolitical tensions in Europe, the sanctions against Russia, they have contributed to the current strong freight rate environment, fundamental drivers that are not directly related to the geopolitical situation here in Europe have been an important factor as well. Here to mention some of the key drivers, then U.S. Gulf refiners, they've been running at a utilization rate above 95% over the second quarter of 2022 and even slightly higher in July of this year. This has led to strong exports from the U.S. Gulf, which have been met by strong import demand here, to mention, especially South America. Strong product inflows caused vessel discharge delays on the West Coast of Mexico. This led in turn to logistical floating storage in that region.
We also saw exports of oil products from the Middle East to Europe, to Africa and Asia increase here in the second quarter, despite delays at the ramp up of secondary units at the new Jazan refinery. Demand for imports from countries which have recently seen the refinery closures, and here to mention the most notably are Australia, New Zealand, South Africa, those imports also continue to grow in the second quarter of the year, leading obviously also to a stronger demand for our services. Please turn to slide six. Over the coming two to three years, we see that the main demand and supply drivers on the product tanker market will continue to be highly supportive. The key demand side driver is expected to be the EU ban on Russian oil products, which leads to a need to recalibrate the whole oil product trade ecosystem.
This will lengthen trade distances and hence, obviously increasing the ton-mile demand for tankers. The trade recalibration effect comes on top of the changes in the refinery landscape, with recent refinery closures in importing regions and new capacity additions in the exporting regions, which is expected to lead to higher ton-mile demand. Further support is expected, again, from the need to replenish both commercial but also the strategic oil inventories in many countries, and inventories have been growing for two years now. This will lead to an additional trade volume, again, supporting the underlying product tanker market. We should not disregard the fact that the current environment with high oil prices and a high inflationary pressure on the global economy at large are likely to slow down the growth pace of the global oil demand.
The signs of this were seen in the U.S. recently, where gasoline demand this summer reacted to the high prices and fell below last year's levels after gasoline prices reached record high levels. Nevertheless, we believe that the effects of the redistribution of the energy supply chain will outweigh the potential negative effects caused by slower demand growth, and it will be further supported by the need to refill commercial and strategic reserves once the oil price structure will be supporting that. Further, the increasing oil use in power generation and the gas to oil switching in industry, especially in Europe, are likely to add further support to global oil demand. Now if we turn to the supply side, to the ton-mile side, the product tanker supply situation has not been as favorable as we see it right now for, let's say, at least the last two decades.
With the current low order book, with the limited new building activity and actually also the strengthening that is ongoing right now of the crude tanker market, this will all contribute to this. Even if we come into an environment with high earnings over longer, this will trigger more new building ordering activity. These vessels would not come to the market before at the earliest end of 2024, or for the majority, even later. This will secure that we are looking into a scenario with low fleet growth for at least the next two to three years. Please turn to slide seven. Now on this slide, what we tried is to quantify the expected increase in ton-miles from the drivers for this year that I mentioned earlier.
Here, when we do a bottom up and calculate the EU ban on Russian oil products and the corresponding trade recalibration, it will add a net of 7% to the product tanker ton-mile. This is purely based on changes in trade distances only. For instance, if Northwest Europe imports diesel from the Middle East instead of from the Russian Baltic ports, it will increase the ton-mile for the same amount of fuel by around three times. Now, this is a permanent effect which will bring the fleet utilization rate to a new higher level as long as the sanctions against Russia are in effect. On top of that 7%, we expect a ton-mile growth of 3% from the continued oil demand recovery from the COVID-19 effect during the year.
This comes to include as well the impact of the recent refinery closures in, for example, Australia, New Zealand, South Africa, which, with the import needs of all of these regions actually increasing. As mentioned already on the ton-mile supply side, it's really protected for the coming years. We see a low fleet growth for this year and also the next couple of years. The overall order book fleet ratio is now at 5%. With contracting activity for the past four quarters being very low. When we add that all up, we can also look at that we need to deduct the Russian-owned product tanker fleet that will no longer be available to the world market due to sanctions, and this will account for about 2% of the total product tanker fleet.
Finally, since the beginning of the year, we've seen a considerable number of LR tankers shifting into dirty trades on the surging Aframax trades immediately after Russia invaded Ukraine. Then we saw a shift partly back to clean trades as clean trade tanker earnings climbed above the dirty earnings. This has led, in total, to a 2% net decline in clean trading LR2s compared to the beginning of the year. Now please turn to our slide number eight. Here, when we look more closely on the impact of EU sanctions against Russia, we can say that so far, we've actually only seen a limited shift in trade pattern, and the full demand effect will only be recognized by early February 2023, when the EU sanctions will come into full effect.
If we look at European oil products from Russia, and most of this is diesel, the average daily volumes so far this year are actually even slightly higher than what they were last year, meaning trade recalibration has, in some ways, even not started. Nevertheless, imports from non-Russian origin have increased, reflecting the recent refinery closures in Europe, which have led to increased import demand into the region. If we look at more detailed data, European imports from Russia have actually declined since February 2022 when Russia invaded Ukraine, but the decline has been relatively small and from a high base. The positive impact on the freight rates has, however, been significant already.
This recalibration will be facilitated by the ramp-up of the Jazan refinery, as already mentioned, in Saudi Arabia, and the start-up of the Al Zour refinery in Kuwait, both scheduled to coincide in the coming months. Here, kindly go to slide number nine. If we look at medium and long-term demand drivers which go beyond the trade recalibration due to the geopolitical conflict we are facing in Europe right now, we have already seen more than 2 million bbl per day of refining capacity being closed down permanently. A further 0.6 million is scheduled to be closed down during this year and into next year. On top of that, another 1 million bbl per day of capacity is at risk of being shut down.
Most of the affected capacity is located in regions which are already large importers of refined oil products such as Europe, the U.S. West Coast, the U.S. East Coast, and again, the three countries that I mentioned a number of times, Australia, New Zealand, South Africa. Here, even in regions where refiners were already closed down in 2020 or 2021, we have not seen the full effect on the import demand yet, as oil demand has not come back to the pre-COVID-19 levels. At the same time, more than 4 million bbl per day of new capacity is scheduled to come online, mainly in the Middle East, China and India, regions which already today are the large exporters of oil products.
Both these trends are positive for trade flows and ton-mile in the coming years, with only a few projects which are less positive for the trade. Slide 10, please. As already mentioned, oil product inventories have been reduced since the summer of 2020 as refinery production has lagged behind the recovery in oil demand. This is especially the case for diesel, where inventories in main trading hubs have fallen to 20% below pre-COVID-19 levels, the same magnitude as the excess stock seen in the early months of the COVID-19 pandemic. The need here to replenish the stock to at least pre-COVID-19 levels translate into higher fuel transportation needs, adding at least 2% to the ton-mile demand for product tankers.
Now, the exact timing of this 2% effect is uncertain given that currently we have a tight supply-demand situation for diesel and on top of that, a backwardated price structure. Here, kindly turn to slide 11 in the deck. Our positive outlook for the demand for product tankers in the next three to five years coincides with supply side, which is the most supportive, which it has been for at least the past 25 years. With record high new building prices and limited shipyard space, tanker ordering has been muted for the past four quarters. As you know, the order book has consequently fallen to a fleet range of product tankers at a historically low level of 5%.
This is further supported by similarly historically low 5% order book fleet ratio for crude tankers. Consequently, the fleet growth here in the next couple of years will be around only 1%-2% a year, which is only half the pace that we've seen on average over the past five years. Yeah, conclusion, my concluding remarks on this tanker market is that we really expect that we will continue to see volatility on the market, of course, due to the current geopolitical tension, but that there will be considerable ton-mile increases due to the oil trade rerouting. This is supported again by the increased refinery dislocation effect and the need to rebuild depleted crude and product inventories. Please turn to slide 12.
Take a look here, as you can see, TORM's commercial performance. We have with our self-imposed framing restrictions performed on the average of our peers, and in almost all quarters during the past six years we have outperformed our peers in our largest vessel class MR. Here in the second quarter of 2022, we achieved rates of $29,174 per day. In general, I'm highly satisfied that the One TORM platform consistently deliver strong results on a day-to-day basis. I turn to slide 13. Our strong TCE earnings are driven by our continued focus on positioning our vessels in the basin with the highest earning potential.
If we look isolated at second quarter of 2022, we again had an overweight west of the Suez Canal, where we also saw an outperformance when looking at the full quarter. Hand over to you, Kim, and you can dig further in and elaborate on the cost performance, our liquidity, and, of course, trading in our stock.
Thank you, Jacob. As Jacob mentioned, we have seen a continuous rate increase in the tanker market in the second quarter of 2022, with our TCE rates reaching $29,622 per day. Spot rates are just below $35,000 per day for the quarter, but due to our accounting principles, part of the revenue related to the increasing rates at the end of the quarter will be recognized after the quarter. So far in the third quarter of 2022, we have seen a further increase in TCE rates per day, and we have now fixed 77% of our days at $45,462. Due to high repair and maintenance costs, we saw an increase in our operating expenditures during the second quarter of 2022.
However, for the first half of 2022, total opex per day was at $6,625 compared to $6,652 per day in 2021. Yeah, we are slide 14 for your information. TORM's admin cost in Q2 2022 was $12,500. We will maintain our focus on cost optimization without jeopardizing quality and customer focus as fully annualized EBITDA breakeven is expected to be around $8,600 per day. Please turn to slide 15. TORM continues the strong performance with EBITDA for the first six months of 2022 being at $214 million. While divesting certain of our older vessels, as Jacob mentioned in the beginning and having the LR2 TORM Hannah deliver.
During the second quarter of 2022, net LTV decreased to 43% due to an approximately 13% increase in vessel value compared to the first quarter of 2022 and strong cash generation from our operations. CapEx commitments are limited, our cash position is very solid. We are now planning to install a total of 68 scrubbers on our fleet, eight of which are yet to be ordered. The investment in the eight additional scrubbers will be around $16 million. Please turn to slide 16. TORM will distribute approximately 74% of the net cash generated during the second quarter of 2022 as dividend.
Consistent with our distribution policy announced earlier in May 2022, our distribution is based on cash position, including the working capital stability at total of $203 million, less restricted cash primarily related to financial instrument of $24 million, less earmarked proceeds of $24 million, and a minimum cash reserve for eight vessels of $120 million. We have included $14 million related to the sale of a vessel which first was delivered in July, but the related debt was paid down in June. In conclusion, TORM will distribute dividends per share of $0.58 or approximately $47 million. We have it with our new term current distribution policy, and that it will already now benefit our shareholders. Please turn to slide 17.
During the second quarter of 2022, we repaid debt of $42 million. Debt repayments related to the sale of TORM Horizon and TORM Gudmund constitutes $9.8 million. Looking at our maturity profile, we have no major refinancings until 2026. We have low financial leverage, dedicated earmarked proceeds, which provides TORM with financial and strategic flexibility to also pursue value enhancing opportunities should they arise. We are very pleased with our stable maturity profile and financial leverage.
Slide 18, please. Since the establishment of our dual listing back in 2017, we have worked on getting a better reach to the U.S. market. We are therefore pleased to see that the average daily trading has increased by almost four times over the past year, with our U.S. market picking up strongly. Trading volume at Nasdaq New York accounts for approximately 57% of the total trading volume during the second quarter of 2022. Since the end of Q1, TORM's market cap increased by approximately 115%, which is also supported by our operational leverage. TORM currently maintain a high operational leverage, which means that an assumed $1,000 per day increase in spot rates over the course of a full quarter should all other things being equal, result in a profit effect of $7.2 million.
Right before we entered into this meeting, the TORM share was trading at, in Danish kroner, DKK 154, with total market cap in Danish kroner around DKK 12.6 billion. In U.S. dollars, that will equal around just above $1.7 billion. With that, I will let the operator open up for questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. Our first question is from the line of Jonathan Chappell from Evercore ISI. Please go ahead.
Thank you. Good afternoon. Jacob, my question. Hi. My first question, I'm trying to recalibrate slide seven and eight. On slide seven, you have the ton-mile start of 2022, ton-mile start of 2023 with the 7% impact from the ban on Russian oil products. On the next slide, you say that it really hasn't even started yet, and it won't really kick in until 2023. Is this 7% that you're incorporating within the start of 2022 to start of 2023 your estimate for the full impact of this recalibration in kind of a pro forma manner? Or are you saying there's a 7% impact this year, and then once the sanctions truly kick in in February of 2023, there's the potential to be even greater?
Let me clarify that. So what we are trying to describe on slide seven is exactly to your question, is to illustrate what will be the full effect between January 2022 up until January 2023 of the trade recalibration. Our estimate is that out of the 7% that we model out, about 2% of this is already baked in to this. So there's still more to come. Then the 3% additional is also over the year, the effect of the refinery dislocation and just demand growth.
Got it. Okay, that helps. My second question is a clarification and then a question off the back of it. In your release, you note that you have six vessels that are held for sale at the end of 2Q 2022. If I read the timing of the vessel by vessel, it looks like the Ingeborg, the Valborg, Gyda, and Moselle would be the four that hadn't been delivered as of 6/30/2022, 'cause the other four were delivered before the end of the quarter. I'm just trying to figure out those four and how that relates to six held for sale. The second part of that would be, does that either insinuate or would you kind of confirm that at this part of the market, you're still looking to liquidate some of the legacy older vessels in your fleet?
You're absolutely correct in everything that you described. Four vessels, the ones mentioned by you, have been sold. There are two vessels that we're contemplating potentially selling that we in our books have put as vessels held for sale.
I guess the final one would be after the two that you're contemplating for sale, how many, you know, over 12-year-old vessels would be remaining in your fleet? Would you figure at some point in this upturn, you would contemplate kind of the completion of the modernization of the fleet?
That's a good way. I don't think that we are. I can come back to you on how many is over 12, but I think what we see as a useful lifetime of our assets is actually, as you can see from the way we put it, on average around 18 years. We don't really have a particular strategy to lower that, especially with the earning power that we foresee for all assets irrespective of age in the current environment.
Okay. Jacob, very helpful as always. Thank you very much.
Thanks. Have a great day.
The next question is from the line of Richard Diamond from Castlewood Capital. Please go ahead.
Yes. Good afternoon. If someone were to order a new ship which has a useful life of 18 years and take delivery in 2025, what would they use for a power plant? 68 is too expensive, ammonia is too dangerous, and methanol has half the energy density of diesel. You'd have to either build much larger tanks on ships or reduce the distances that ships would be able to travel. Do you have any thoughts?
Yeah, thanks. Thanks for that question, Richard. I think my current instinct is that as you point to, if you are investor who decides upon, let's say in 2025, to have an asset where the usual lifetime goes up until almost close to 2050. We have at this stage no clarity on the future fuel as such. Of course, we can say that it's probably gonna be within the range of what you just described. I think that the smart investor would purchase a vessel that has a conventional engine type, i.e., ability to efficiently burn low sulfur or high sulfur fuel with a scrubber.
What you would want is for that engine to have the optionality and flexibility to be able to already now be retrofitted for other fuel types. For instance, methanol or 68 or others. The problem comes that retrofitting will come at a relatively high CapEx, because the CapEx with the transformation into other fuel type is not really with the engine itself, it is with the storage of the fuel and storing of sufficient fuel in order to make transshipping a workable, how can I say, methodology for that asset. That's the way I think about it currently.
This is a follow-up question. The cost of such a ship would have to be 15%-20% more, and given potentially the shorter life, rates would have to be substantially more expensive to justify the investment. Am I thinking about it correctly?
Not necessarily. I follow your line of thought. I think the additional cost from what I just described is marginal, because what I just described is really you're preparing to make the bigger investment at a later stage. You are actually just making a flexible engine. That is possible with, for instance, MAN, that you have an electronic engine that can already be prepared with very little modification to use different types of energy. Out of the box, your additional cost is much more marginal, no, higher than what you described. Of course, ultimately, you will need to make the storage tanks available on board the ship. That is where you would have the ramp up to the probably 20% is, you know, a fair estimation of that in the current environment.
Thank you very much.
You're welcome.
The next question is from the line of Anders Karlsen from Kepler Cheuvreux . Please go ahead.
Yes. I have a question in terms of term fixtures and your view on, you know, what levels would be enticing enough for you to start fixing out ships, whether or not you have fixed out any ships for longer term charters during the quarter.
Yeah. The answer to that question is that there is more interest from the type of counterparties which we would like to engage with today than what we saw, let's say, when we had our Q1 result back in May. We've still not been enticed to engage in that. I think some of the end users are slowly starting to look at strategically taking returns for, let's say, three-year charters. It could be that it will be interesting in the time to come here to look at something like that. We have not done any deal at this stage.
Okay. Do you have any, if you were to start fixing, is there any limit to how much of your fleet you would fix out? Or do you have any preference in terms of your spot/time charter exposure?
No, I think it will depend on the liquidity in this term market is not at this stage very high. So I think it would
Simply the availability of the counterparties of sufficient quality as number one and to the other side. I wouldn't put a particular figure on it. We don't have a strategy that we want to be the spot. We just see that so far it's the strategy that has generated the highest return to the company over time.
Yeah, that's fair. Thank you.
There are no more telephone questions at this time, and I hand back to Andreas Abildgaard-Hein.
Thank you. We have a few questions on the webcast. I think the first one is for you, Kim. You mentioned that it was spot rates for Q2 was almost $35,000 per day, which is higher than the TCE rate. There's a question here. Can you please just verify the difference between the spot rate and the TCE earned rate?
Yeah, thank you, Andreas . You're right on your comment that you will see the definition on our page 10 in the quarterly report with the spot and the TCE. On top of that, our revenue recognition principles are what we call load to discharge. That means that when we fix a voyage, you know, fix it with a charter party until we load it, that is not recognized as revenue until we load the cargo. In a scenario where you are at an end of a quarter, for instance, then you fix on an increasing rate. You have a high spot rate, but you will have a full recognition or much of the recognition of that revenue in the coming months or quarter.
In the scenario we've been in the end of the Q2 quarter, we actually saw the high degree of the revenue going into the next quarter. If it is there, it's just gone into the next quarter, and then we don't know what will happen at the end of that quarter. That's how the revenue recognition definition is.
Hope that helps. Thank you, Kim. A question for you, Jacob. Could you talk about the downturn in MR rates we have been seeing on the recent weekly TCE report? How sustained is that downturn, and does it send a downward TCE rate for LRs as well?
Yeah, I can try and talk into that. What we've seen at least is that, in the Atlantic Basin, MR rates has eased somewhat. My overall impression is the same as I've described earlier in our presentation in the call, is that we will have volatility. When we are at these levels, small changes in demand supply leads to relatively high changes in the underlying freight rate simply because we are so high out on the utilization curve. We've seen that trend over the last couple of weeks, that the rates are a little softer for MRs in the Atlantic.
The specifics of it, I believe, is just that there has been a little less number of cargoes coming out of some of the refineries, especially on the U.S. side, and that simply takes away just the top of the market. I don't think it's an underlying trend that will lead to changes in other sectors. I don't think that it is a trend of now we've seen the end of this market. It's absolutely correct that currently in the western hemisphere, MRs have traded down from the highs. It was actually so that just in the early part of August, we fixed an MR in the U.S. Gulf at around $80,000. If you did the same voyage today, you would probably get something around $30,000-$35,000.
That's high volatility, I would say, because as you all understand, that's nothing that has fundamentally changed in our market. I think we're gonna see this tendency to a very high volatility continue. I don't see that something that will lead into the other segments.
Thank you, Jacob. A final question. What are the risks that the EU's Russian embargoes on Russian oil and oil products are not yet in force?
Yeah, that's a very good question. I think it's more for politicians and diplomacy to give the answer. But the insight I've got is that, let's just play out that the war in Ukraine comes to an end abruptly very, very soon. That could be my personal hope, that the suffering in Ukraine stops. In turn, what will then be the decision-making process in the EU around the sixth package of sanctions and other sanctions on the regime in Russia. Personally, I can say that I would be disappointed if the war comes to an end and that we then see that we turn everything back to normality being as the world was before the 24th of February 2022.
However, of course that is something that politicians would be capable of deciding. That's not my instinct that that is the undercurrent when I listen to diplomats and politicians in the EU. It is of course something that one should think about as a risk. I think it's unlikely.
Thank you, Jacob. No, further questions. This concludes the earnings conference for the second quarter and first half year of 2022 results. Thank you for participating.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.