Earnings Call: Q2 2021

Aug 10, 2021

Thank you. And thank you all for dialing in, and welcome to TORM's conference call regarding the results for the Q2 and the first half of twenty twenty one. My name is Andreas Evelgohein, and I'm Head of Treasury and 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 2. Before commencing, I would like to draw your attention to our Safe Harbor statement. Please turn to Slide 3. The results will be presented by Executive Director and CEO, Jacob Melgaard and CFO, Kim Bell. I will now hand the call over to Jacob. Yes. Thank you, Andreas, and good afternoon to all of you. Thank you for dialing in. Here, please turn to Slide 4. I'm happy to be here today. And as you know, we have today published our results for the Q2 and first half of twenty twenty one. The Q2 of 2021 was negatively impacted by the market downturn caused by the COVID-nineteen pandemic, which has lowered the global demand for oil products. Because of our strategic choice to increase coverage during the second half of twenty twenty and our strong performance in the spot market, the second quarter ended with an EBITDA of $45,000,000 and a profit before tax of $2,000,000 Return on invested capital here ended at 2.6%. Our product tanker fleet realized an average TCE rate of almost $14,600 per day, well supported by our largest segment, the MR segment, where the achieved rates were above $14,500 per day. Now looking into the Q3 here of the year, we have secured bookings at approximately 13,300 per day, and we are already now looking into a weaker result in Q3 than realized in the Q2 with 65% of our earning days already covered. We're taking delivery of all the team tanker vessels and of 2 out of the 3 modern LR2 scrubberfield vessels we bought. And we have secured operational lease financing for 3 LR2 vessels and 2 of them RS sale and leasebacks of already owned vessels. Here, please turn to Slide 5. As you're all aware, the IMO has adopted the EEXI and CII measures in June of this year, and vessels will need to comply with these measures in the future. The EE XI must be complied with from 2023. And considering TORM's current fleet, approximately 60 of our vessels are governed by this measure. TORM will be ready for implementation of this already in Q1 of next year and will comply by limiting the main engine power. We are not expecting we are expecting a relatively minor impact on the TORM fleet and also on the capacity of the global tanker fleet as not all vessels are impacted, and the ones that are only impacted by a limited speed reduction at a limited part of the distances that will be traveled. Please turn to Slide 6. TORM needs to comply with the CII requirements from 2026. Consistent reductions in AER since 2008 have put the vessels in our fleet in a good position to obtain also good ratings. We use our integrated platform to ensure the highest possible focus on CO2 emissions, and we expect to meet the 40% reduction target well before 2,030. So all in all, we can welcome the initiatives to reduce CO2 emissions, and TORM is well prepared for IMO's measures. Please turn to Slide 7. It's now approximately a year and a half since the COVID-nineteen made its dramatic entrance and the product tanker market continues to be affected by local breakouts and lockdowns. We've seen significant progress with vaccine rollouts in Europe and the U. S, which have had a positive effect on mobility and on the oil demand recovery. However, we have seen an outbreak of the more transmissible delta virus variant, especially in Asia, first in India in April, May, and where the situation has actually now started to improve. And lately, it's also in Southeast Asian countries, where vaccine rollout has been relatively slow. These short term headwinds for the product tanker market have been further aggravated by the very weak crude tanker market, leading to increased crude cannibalization and also to LR cleanups. The recent agreement by the OPEC plus members to continue to ease the production costs should nevertheless offer some relief also to the crude tanker market. And here, kindly turn to our Slide number 8. We've been emphasizing for some time now that the developments on the product tanker market are to a large extent explainable by movements in product stockpiles and the inflection point on the product tanker market will most likely be reached once the current stock growing phase ends. We cannot estimate the exact timing, but we assess that around twothree of the excess stockpiles have been drawn down, and we have moved significantly closer to the balance point. The recent outbreaks of the delta virus variant are currently posing local demand setbacks. And it obviously remains to be seen how long it will take to get this more transmissible variant of the virus under control, we believe that the general oil demand recovery trend remains intact. Please turn to Slide 9. Our base case is that with accelerating vaccine rollouts, the virus gets under control and the affected countries can reopen, leading to wider recovery in the macroeconomic activity and oil demand. And indeed, if we look at China, where local outbreaks so far have been efficiently contained and the very recent flare ups are likely to be put under control as well. Oil demand has exceeded the pre COVID-nineteen levels for the past 12 months already. India has similarly shown strong rebound from the initial COVID wave as well as the recent delta variant outbreak, although there's still some way to go. And when we look at that around 50% of the population is fully vaccinated in the U. S. And in several European countries, oil demand recoveries is on track there as well. Combined, these countries account for more than half of the global oil demand. Here, please turn to Slide 10. To further illustrate that point, we have indeed seen strong improvements in mobility indicators in regions with higher vaccination rates in recent months, which has supported demand for road transportation fuels. As I mentioned before, countries in Southeast Asia are this time affected by renewed mobility restrictions. Nevertheless, it's also important to remember that this region only accounts for around 10% of the global oil demand. When we look at demand from the aviation sector, which has been the most affected by COVID-nineteen, demand here continues to lag the overall improvements. But also here, we've seen progress in recent months. For example, the number of flight travelers in the U. S. Is currently only 20% below the 2019 level, while back at the beginning of the year, it was 60% below the 2019 levels. Similarly, inter European flights have made a comeback and are now 30% below 2019 levels, although cross continental flights are still not back to the same level. Slide 11, please. When we turn to more medium and long term market drivers, the COVID-nineteen pandemic has accelerated the pace of refinery closures with more than 2,000,000 barrels per day of refining capacity having closed and another 1,000,000 barrels per day potentially at risk of closure. Most of this capacity is located in regions, which are already large importers of refined oil products, such as Europe, U. S. West Coast, the U. S. East Coast, Australia, New Zealand and also South Africa. To illustrate the significance of the mentioned refinery closures, refineries closing down or at risk of closing down account for 7% of the total refining capacity in the world's largest diesel importing region, Europe 12% of the U. S. West Coast and 28% of the U. S. East Coast capacity. For Australia and for New Zealand, the figures are even more significant. 2 out of 4 refineries in Australia are closing down and the sole remaining refinery in New Zealand is most likely to be closed down as well. At the same time, more than 4,000,000 barrels per day of new capacity is scheduled to come online mainly in the Middle East and China. Regions we already today are large exporters of oil products. Both these developments are positive for trade flows and for the ton mile in the post-nineteen world post COVID-nineteen world. There are only a few projects which are less positive for trade, which notably is the Dangote refinery planned to be set up in Nigeria. And here, please turn to Slide 12. Our positive outlook for the demand for product tankers in the next 3 to 5 years coincides with the supply side, which is the most supportive for at least a couple of decades. The order book to feed ratio for product tankers stands at around 7%, which is a historically low level. The recent record high newbuilding ordering in the container segment has filled up shipyards capacity And it has made it more difficult to order product tankers with delivery before 2024. At the same time, a strong increase in the steel prices have pushed product tanker newbuilding prices up to a decade high level. Since the end of Q1 of 2021, new building prices have increased by 10%. And on the other hand, surging scrap prices have incentivized increased scrapping of product tankers. Has been more tonnage removed from the market this year to date than an average for any full year during the past 10 years. These two drivers are further supporting the case of a very modest fleet growth over the next 2, 3 years, which we expect to be at around 2% a year, only half the pace seen in the past 5 years. At my concluding remarks on the product tanker market, we expect to see volatility in the market in the short term related to local outbreaks of the more transmissible virus variant and the consequent impact on global oil markets and economic activity. Aside from the COVID-nineteen effects, we see that a number of key market drivers for the next 3 to 5 years will remain positive, such as the refinery dislocation, the lower order book, which both will provide support to product tankers over the longer term. Following the market dynamics, TORM is well positioned to both maneuver and utilize opportunities here in the current low market environment through our strong capital structure. As the market returns, we are also well positioned to utilize the common market strength through our operational leverage and the integrated platform. And here kindly turn to Slide 13. When we look at TORM's commercial performance here, I'm truly pleased that in the Q1 of 2021, we have again outperformed the peer group average in our largest segment, the MR. In the second quarter here, we achieved rates of $14,566 per day compared to a peer group average of $12,163 per day. This translate into an additional earning of $11,000,000 for the 2nd quarter alone and $24,000,000 for the first half of twenty twenty one. I'm very satisfied and proud here that our operational platform continues to deliver these very competitive TCE earnings. And we are now turning to Slide 14. A key deciding factor for delivering above average TCE earning is driven by our continued focus on positioning our vessels in the basins with the highest earning potential. In the Q2 of 2021, we had a slight overweight east of Suez, where we also saw a slight outperformance when looking at the quarter as a whole. Looking here at the Q3 so far, the MR outperformance turned over to West of Suez, and this is same as the majority of our MR fleet during the quarter. I'll now hand it over to my colleague, Kim, for further elaboration of our operational leverage, cost structure and the balance sheet. Thank you, Jacob. Please turn to Slide 15. As part of our coverage strategy, we used a combination of freight rate, derivatives and physical contracts to take cover in the market during 2020 2021. We have taken significant cover through the derivatives market and we realized the gain of $14,500,000 during the period. As Jacob talked into, we still see promising market fundamentals and we have therefore reduced our coverage for the coming quarters. Please turn to Slide 16. With our spot based profile, TORM has significant leverage to increase the under to increase in the underlying product tanker rates. As of June 13, 2021, we had just above 11,400 opening earning days in 2021 and almost 30,000 opening earning days in 2022, adding the LR2 vessels taking over in Q3 2021, the number of earning days will increase with around 1,000 on an annualized basis. For the coming quarter TORM had coverage, covered 65% of our days at $13,387 per day as of 5th August 2021, which is a reduction compared to the previous quarters as just explained. Please turn to Slide 17. As you know, we have increased our fleet to 82 vessels and have 3 on order, and thereby, we have been preparing for an increase in demand for the product tanker business. We have done this while still maintaining our conservative capital structure with a net LTV of 54%. During the first half of twenty twenty one, we have deliberately reduced our coverage for the coming period. And by doing this, we have freed up restricted cash and increased our operational leverage, thereby increasing the earnings potential for the market recovery. At the same time, we have due to our strong performance in Q2 maintained a strong cash position making us resistant to potential delays in the market recovery. Please turn to Slide 18. As of June 30, 2021, TORM had available liquidity of $267,000,000 where off cash totaled $111,000,000 and we had undrawn credit facilities of $156,000,000 the total cash CapEx commitments related to our new buildings and the latest MR secondhand vessel purchases were $129,000,000 as of 30th June 2021, and this excludes the share based payment related to the MR purchases. With TORM's strong liquidity profile, CapEx commitments are fully funded and very manageable. Please turn to Slide 19. After having finalized the refinancing last year, we have eliminated all major refinancing until 2026, which provides TORM with financial and strategic flexibility to pursue value enhancing opportunities in the market. And you can see here, we do not have any major repayments until after 2025. And please turn to Slide 20, where I would like to sum up our financial position in terms of key metrics such as net asset value and load to value. Vessel values have increased by almost $200,000,000 over the last quarter with a significant increase in the value of existing vessels. The value of Tormes vessels including new buildings and committed secondhand purchases was just around $1,900,000,000 by the end of the quarter. Outstanding gross debt amounted to $999,000,000 as of June 30, 2021. As mentioned earlier, we have financed the Team Tanker transaction, partially with issuance of shares, and we have recently entered into operational lease on one of the LR2 secondhand acquisitions and 2 existing vessels, which gives us the benefit of reduced asset risk, attractive pricing an LTV, which retains our strategic flexibility. All in all, we have a strong the attractive price debt structure with reputable banks and leasing houses, which we repeatedly cooperate with. We are very satisfied with our debt situation. Finally, as of June 30, 2021, we had outstanding committed CapEx of $143,000,000 related to our newbuilding program and the MR and LR2 secondhand vessel purchase. As mentioned, our cash position was $111,000,000 So the net asset value is hence estimated at $931,000,000 as per 30th June 2021. This corresponded to $11.8 or DKK 73.8 per share. And just before commencing this call, Tom's shares were trading at DKK 51.5. I'm pleased that our conservative balance sheet supports our strategic flexibility as well as financial strength. With that, I will let the operator open up for questions. And we will now take our first question. Your first question comes from the line of Jon Chappell from Evercore. Your line is now open. Thank you. Good afternoon. Good morning, John. Yes. Jacob, before I get started, I have a Got a bad connection, so I'm going to try to be slow and clear here. And if you need me to repeat my question, happy to do so. So on Slide 14, The positioning of the FRC primarily in the West makes sense given the mobility charts that you laid out and everything we know about the lockdowns or removal of lockdowns across different countries. It does seem that maybe the spread The West East isn't as large as one would think. And I'm just wondering about the flexibility to shift that if the Asian countries come out of lockdown We've got to get balanced, maybe even focused more on the East if the COVID thing has slipped on their head in the coming months. Yes. Thank you, Jan. So I'll just repeat the question as I understand it. It's our flexibility to shift between the base and should it prove that, let's say, that because of the current lockdowns in the East that there is a better paying market in that part of the world than in the West, what's the flexibility. And you can see here, over time, actually that, let's say, between Q3 and Q4, back in 2019, we had a major shift in the fleet. And so I think we had demonstrated then that if we had the strategic view that it would be beneficial to our fleet, mainly in the East. I think we can say that we can at least move this by 20%, 25 percentage points relatively quickly. The way that we integrate it on our platform can decide on taking particular type of cargo movements at any given time. So we cannot shift fully so that you would be fully naked in one or the other area. But I'm confident in saying, I think 20, 25 percentage points, we can shift in between quarters when we strategically decide so. Great. Thank you. Just from my second question, Slide 5 on the EXI, not a lot of people are talking about this. Yes, I feel. So it's interesting you're very proactive at the start of your presentation with this. Limited impact on TORM Makes complete sense in the way you laid it out. Just wondering if you had a chance to assess the impact on the industry. If your fleet is in a position where There'll be limited downtime or impact from slow steaming, but it could be a tightening mechanism for the industry. Do you have any initial thoughts on that? Understanding it's still a couple of years away. Yes. We I mean, so the data that we are utilizing. You can actually, obviously, from AIS data track the global fleet of product tankers or any other sub segment that you may choose. And when we do that And we our estimation is that it is, let's say, roughly 1% of supply that you are diminishing by once you come to having to comply with the EE XSI in a product tanker world. It's probably slightly higher in crude tankers, but it's not our specialty. But if we do the same use the same methodology for the larger vessels for VLCC, Suezmax and AFRS, we probably come to about 2%. Okay. There are no questions at the moment. Please continue. Okay. Thank you. This concludes the earnings conference call for the Q2 and first half of twenty twenty one results. Thank you all for participating. Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.