Ladies and gentlemen, thank you for standing by, welcome to TORM's Q3 2019 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question over the phones during the session, you will need to press Star and One on your telephone. I must advise you, the conference is being recorded today on the 12th of November 2019 . I would now like to hand the conference over to your first speaker today, that's Morten Agdrup. Please go ahead.
Thank you, thank you for dialing in, and welcome to TORM's conference call regarding the results for the third quarter of 2019. My name is Morten Agdrup, and I am the head of Corporate Finance and Strategy in TORM. We will refer to the slides as we speak, and at the end of the presentation, we will open up for questions. Slide two, please. Before commencing, I would like to draw your attention to our safe harbor statement. Slide three, please. With me today is Executive Director, Jacob Meldgaard, and he will be hosting the call.
Slide four, please. Thank you, Morten. Good afternoon. TORM's third quarter 2019 results reflects the softer market conditions in the product tanker segment. Going into the fourth quarter, the product tanker market has strengthened significantly. As the demand and supply balance tightens towards the upcoming IMO 2020, individual events have caused spikes in the product tanker freight rates to levels last seen in 2008. We remain excited about the developments in the market. I'll now take you through our results. In the third quarter of 2019, we realized a positive EBITDA of $32 million and a loss before tax of $8.5 million or $0.12 per share. TORM's return on invested capital was positive at 0.4%.
The estimated net asset value was $887 million as of 30th September, and later in the presentation, I'll take you through a breakdown of this metric. Illustrating our continued focus on maintaining a solid balance sheet, the net loan to value was 50% at the end of the quarter, and available liquidity was $337 million. With respect to the freight rates, TORM realized an average TCE rate of $13,392 per day in the third quarter of 2019. In the third quarter, and so far into the fourth quarter, we've taken delivery of three MR new buildings and four 2011-built MR vessels acquired during the second quarter. We've also sold four older vessels, two MR vessels, and two Handysize vessels.
The vessels have been sold for a total consideration of $35 million, and a total $18 million in debt will be repaid in connection with the vessel sales. Two of the vessels have already been delivered to the new owners. In support of our strong capital structure, we also entered into eight sale and leaseback agreements in the third quarter of 2019, providing total proceeds of $151 million. We repaid $39 million in debt concurrent with these transactions. TORM's preparations for the IMO 2020 regulation are proceeding as planned. We are pursuing a balanced approach, and we've decided to install scrubbers on an additional 10 vessels, bringing the new total to 44 vessels. We have, to date, installed 16 scrubbers. Like most other owners, TORM has experienced some delay in the recent scrubber installations.
In order to reduce the risk of further delays and to capture the current market strength, we have decided to postpone some installation into the next year. For the vessels using compliant fuels from 1st of January, we have initiated our customized schedules towards compliance, and the first volume of compliant fuel has been delivered and successfully tested on board our vessels here in the third quarter. Slide five, please. I'll turn to the product tanker market. In the third quarter of the year, our product tanker fleet realized average TCE earnings of $13,392 per day. In the LR segment, TORM achieved LR2 rates of $14,529 and LR1 rates of $14,292 per day.
For TORM's largest segment, the MRs, we achieved rates of $13,125 per day. TORM's Handysize segment achieved rates of $12,251 per day. In general, product tanker freight rates were soft in the third quarter as global demand for oil products remained subdued. Product tanker rates were generally stronger in the East than in the West.
In the West, transatlantic gasoline flows were at healthy levels, but the lack of volumes into West Africa and low naphtha arbitrage flows to the East kept rates suppressed. In the east, the market experienced quite a bit of volatility, driven by attacks on tankers in the Strait of Hormuz in the beginning of the quarter, the return of export-oriented refineries from maintenance in the Middle East and India in the middle of the quarter, and finally, attacks on Saudi Arabia's crude oil facilities mid-September, affecting half of the country's crude production. Although the effect was only temporary, and most of the affected capacity was back online again by the end of the month, Saudi Arabia cut runs at several refineries in order to meet its crude export contracts. This resulted in a decline in product exports from the Middle East.
The start of the fourth quarter has been quite different, with an unprecedented strong sentiment in crude tanker markets as a result of the sanctions on the COSCO fleet. This had a strong positive effect on the product tanker market as well. The effect has been supported by increasing demand for clean cargo movements between regions. For instance, we have seen diesel flows increasing from China on record high refinery runs and from the Middle East after refineries have come back to full utilization after the attacks on the country's oil facilities. In the West, U.S. clean petroleum product exports have been capped by refinery maintenance. At the same time, we've seen increasing demand for cargos from West Africa, as well as the U.S. West Coast, where the latter is currently experiencing unplanned outages at one of the largest refineries in California.
The events just described in the fourth quarter is also reflected in our bookings. As of last Friday, 8th of November, the total coverage for the fourth quarter of this year was at 63%, and the rate was $19,531 per day. In our largest segment, the MRs, the coverage was 61% at $18,095 per day. Slide five, six, please. As we just saw on the previous slide, the fourth quarter started with a strong rebound in product tanker rates. Let me elaborate on this a little. At the beginning of the fourth quarter, the crude tanker market experienced a sudden boost in rates following the sanctions on COSCO, which impacted around 4% of the global VLCC fleet.
The positive sentiment had a spillover effect on the product tanker segment, where rates for all vessel classes, but the large product carriers in particular, increased significantly before retreating to current levels. The dramatic rise in crude tanker rates also triggered around 5% of the LR2 fleet, trading in clean petroleum products to switch to the dirty market, which will help sustain the product tanker rates medium term. Slide seven, please. Another matter I would like to draw your attention to is the fact that diesel inventories in the Atlantic Basin are currently very low. While we are in a period where seasonal winter heating demand, as well as IMO 2020 induced increase in diesel demand, starts to kick in. On the USA's East Coast, inventories are currently at five-year lows and well beneath five-year averages. Diesel inventories in the Amsterdam, Rotterdam, Antwerp region are also below five-year averages.
With increased heating demand in the winter months, as well as increased demand for diesel in connection with IMO 2020, restocking will likely be required in the coming months, leading to higher diesel flows into the Atlantic Basin. Low diesel inventory levels are one of several factors supporting our positive market outlook. Slide eight, please. The increasingly positive market sentiment continues to impact vessel values. Values for modern LR2 vessels are currently up by 25%, and values for modern MRs are up by 13% compared to last year's averages. New building activity has been relatively low so far this year, although as the market sentiment has improved, we've seen increased interest for new buildings in recent months, with even some early orders for LNG-based dual fuel vessels emerging. New building prices are currently around 12% higher than the lows that we saw back in 2017.
Slide nine, please. In less than 50 days, one of the most significant reforms in the shipping industry comes into effect, the so-called IMO 2020 Regulation on sulfur content in marine bunker fuels. While the direct effect of this will be higher bunker cost throughout the shipping community, we continue to expect that it will have a positive demand effect on product tankers, as the potential increase in demand for marine gas oil will increase the need to transport gas oil or diesel across regions. Today, almost 4 MMbbl of high-sulfur fuel oil is daily used as marine bunkers. Vessels fitted with scrubbers will continue to use high-sulfur fuel oil, and the remainder of the fleet will need to switch to 0.5% sulfur fuels.
We continue to expect that a considerable part of the new 0.5 sulfur fuel will be diesel-based or based on blends containing diesel. In more detail, we currently expect an incremental diesel demand of around 1 MMbpd from IMO 2020. This will be an important contributor to the overall growth in ton-mile demand that we currently expect will be around 7% in 2020. IMO 2020 effects will account for more than half of this growth figure, with the rest based on other market drivers. However, this growth figure will depend on the speed of the refining industry's ability to shift to Very Low Sulphur Fuel Oil production, also known as VLSFO.
I think it's also important to mention here that IMO 2020 will also have a positive impact on the tonnages supply side, as a number of vessels will be removed temporarily from the market in combination with scrubber retrofitting and tank cleaning. This could potentially lower the fleet supply by up to 1%. Let me elaborate on the demand effects of IMO 2020 on the next slide. Please turn to slide 10. Stricter sulfur rules mean that the shipping industry would need to use additional marine gas oil, which is a type of fuel that belongs to the family of diesel. While the demand for diesel will increase in all world regions, flexibility to increase diesel production is generally higher in regions which are already net exporters of diesel.
For example, considerable volume of new refining capacity coming online in the Middle East and Asia may facilitate increased exports. Russia is producing more diesel as part of its refinery upgrading program, and the complex U.S. Gulf refineries have capacity to convert additional high-sulfur fuel oil that becomes cheaper here after 2020 into diesel. At the same time, the main importing regions, the ones that produce too little diesel, do not see any new refineries coming online in the next two years. Therefore, their ability to respond to increased demand due to IMO 2020 is limited to changes in refinery utilization and product yields. This suggests that on top of the trade flows we are seeing today, even more diesel will be flowing from export regions to import regions. The majority of the incremental demand growth will come from long-haul trade and intra-Asian medium-haul trade.
On top of that, we also expect to see some more short-haul regional trade for redistribution of compliant bunker fuels. Similarly, crude tankers are expected to gain from IMO 2020 due to increased refinery runs and the corresponding need for crude transportation, trade with VLSFO, and the need to store excess high-sulfur fuel oil. Please turn to slide 11. Here, now we will turn to the supply side market factors. The product tanker orderbook-to-fleet ratio currently stands at 6.8%, which is a 25-year historical low level. We estimate that the product tanker fleet growth will exceed 4% this year, but lower deliveries in the next two years will result in an average fleet growth of around 3% per year in the period 2019 through 2021.
This is down to around half of an average of almost 6% during the previous three years. It's also important to mention here that the actual fleet growth in 2019 might come in at a somewhat lower level due to vessels being temporarily removed from the market for scrubber retrofitting. As I mentioned before, recent improvements on the product tanker market have led to some more interest for new buildings. We've been foreseeing some increase in ordering activity with the improved market, we do not expect a quick run-up of the orderbook, given the uncertainty around new potential regulations on vessel propulsions in connection with IMO 2050 CO2 targets. The slowing fleet growth rate is a key point to the fundamental positive development that we expect for the product tanker industry in the years to come. With this, please turn to slide 12.
To conclude my remarks on the product tanker market, TORM has a generally positive outlook, and we expect the growth in the product tanker demand to exceed the supply growth the next 3 to 5 years. The product tanker market is impacted by key economic indicators, such as underlying oil demand and the general state of the economy. Here we've seen some weakness this year, but the segment-specific factors I mentioned are expected to impact the market positively going forward. In particular, IMO 2020 is an exciting development for the market that will certainly bring about both expected and unexpected outcomes. Slide 13, please. Shipowners have two choices to comply with the upcoming IMO 2020 regulation. There's the scrubber installation, which can be done on either new buildings or through retrofitting. The second option is to use compliant fuels on vessels.
TORM's preparations for the IMO 2020 regulation are proceeding as planned. We're pursuing a balanced approach that will result in 44 vessels, slightly more than half of our fleet being fitted with scrubbers. We expect that a total of 23 of our scheduled scrubber installations will be finalized by 1st of January , and the remaining 21 retrofit installations are expected to be conducted during the first and second quarters of 2020. In the first quarter, we expect to install 12 scrubbers, and in the second quarter, the corresponding number is nine. We do not expect the retrofit installation to have an impact on our overall performance, as each installation is carefully planned, taking commercial and technical considerations into account through our integrated One TORM platform.
TORM's compliance strategy, compared to the world fleet, is balanced, and looking at peers, most have chosen to go either with installing scrubbers on all vessels or using compliant fuels on all vessels. With respect to the vessels in the TORM fleet that will be using compliant fuels, we are implementing our 2020 compliance plan, which includes changing bunkers on board each vessel. As mentioned earlier, we've successfully tested the new compliant fuel on our vessels during the third quarter and are now bunkering the fuel on our fleet. The bunker planning and replenishment will be a gradual process and be timed around individual vessels' voyages within the quarter. We expect that other owners are following a similar approach, gradually increasing demand for compliant fuels until the end of the fourth quarter.
To support this process, we expect global ports to stock compliant fuels and to continue to build inventories throughout the year. Slide 14, please. The business case for installing scrubber has become even clearer as 1st of January approaches, with the support being reflected in the price spread between 0.5 compliant fuel and high-sulfur fuel oil. The spread for the calendar year 2020 is currently around $238, declining to $187 in the calendar year 2021. We expect that the price of compliant fuel and the spread versus high-sulfur fuel oil will be volatile for a period of time before normalizing, and additional scrubber benefits may be realized beyond what the current forward spread indicates. Slide 15, please.
Looking at TORM's commercial performance, we had, in our largest segment, MR, outperformed the peer group average 18 out of 19 times since 2015. This translate into additional earning of more than $110 million over the period. This quarter, we achieved rates of $13,125 per day, compared to a peer average of $13,069 per day. In general, I'm very satisfied with TORM's operational platform, which delivers competitive TCE earnings. TORM is well positioned to take advantage of the promising supply and demand fundamentals in the market. Please turn to slide 16. Before reviewing our OpEx and admin expenses, I would like to remind you of TORM's operating model.
We have a fully integrated commercial and technical platform, including all support functions, such as an internal sale and purchase team, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for all our stakeholders, including shareholders, and eliminates related party transactions. Naturally, we are focused on maintaining efficient operations and providing a high quality of service to our customers. Despite this trade-off, we've seen gradual decreases of 17% in our OpEx per day over the last five years. OpEx was approximately $6,100 per day for the third quarter of 2019, and for the nine months, the corresponding number was just below $6,400 per day, which we find very competitive in light of our fleet composition. We also remain disciplined with respect to G&A expenses.
We believe that the EBITDA break-even of $8,600 per day and profit before tax break-even rate of $14,300 per day, achieved through the first nine months of 2019, reflect the efficiency of the One TORM platform and is highly competitive compared to other owners in the product tanker segment. Please turn to slide 17. With our spot-based profile, TORM has significant leverage to increases in the underlying product tanker rates. As of 30th September this year, every $1,000 increase in the average daily TCE rate achieved translate into an increase in EBITDA of around $5.3 million for the year. The corresponding figure increases to $27.9 million in 2020, and to $29.3 million in 2021.
TORM has a positive long-term view on the market, and we believe we are well positioned to generate significant cash flows. As of 8th of November, the coverage for the fourth quarter of 2019 was 63%, at $19,531 per day, which is the highest booking at this stage in a quarter since the first quarter of 2016. For the individual segments, the coverage ranged between $15,000 for the smaller Handysize vessels and up to about $26,000 for the larger LR2 vessels. If we exclude long-term charter contracts from the LR2 segment and only look at our spot fixings in the quarter, the coverage in the LR2 increases to well above $30,000 per day. Slide 18, please. As of end of the quarter, TORM had available liquidity of $337 million.
Cash totaled $121 million, and we had undrawn credit facilities of $216 million. Our total CapEx commitment was $182 million, of which we expect to pay around $76 million this year. The remainder will fall due in 2020. The large majority of our commitments relate to our remaining five high-specification new buildings that all include scrubber installations, but we will also pay $44 million in 2019 and 2020 for retrofit scrubber installations on vessels on the water. With TORM's strong liquidity profile, the CapEx commitments are fully funded and very manageable. Please turn to slide 19. Here, finally, I want to sum up our financial position in terms of key metrics, such as net asset value and loan to value.
Vessel values have increased slightly during the third quarter of 2019, and the value of TORM's vessels was $1.7 billion as of 30th September 2019, including our new buildings. Outstanding gross debt amounted to $850 million at the end of the quarter, and none of our debt facilities mature in 2020. Finally, we have outstanding committed CapEx of $138 million related to our new building program. This gives TORM a net loan to value of 50% at the end of the third quarter. This we consider to be quite a conservative level. The net asset value is estimated at $887 million as of end of the quarter, and this correspond to $12, equivalent to DKK 82.2 per share.
Here, just before commencing our call, TORM shares were trading at 63.4 DKK, or $9.4 per share. In short, we have a balance sheet that provides us with strategic as well as financial flexibility. With that, I'll let the operator open up for any questions.
Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. As a reminder, if you wish to ask a question over the phone, please press star and one on your telephone and wait for your name to be announced. If you'd like to cancel that request, you can press the hash key. Once again, it's star and one to ask a question. Your first question today is from the line of Jonathan Chappell from Evercore. Please go ahead.
Thank you. Good afternoon, Jacob.
Yeah, morning, Jonathan.
3 questions for you. First one, you laid out a great presentation on your coverage and your lower costs and your liquidity to cover your CapEx. There should be a cash windfall coming in, I would imagine. Can you just remind us, I think the dividend policy from the past cycle was 25% to 50%, and would you look at that maybe differently in the first innings of the quarter or of the cycle, maybe the fourth quarter, start out slowly, and then once you've taken delivery of all your new buildings and fitted all your scrubbers and your CapEx falls, could you foresee being a little bit closer to the higher end of that capital return policy?
Yeah, thanks, John. That's an important point, obviously. First and foremost, just to recap, as you point to, we have a policy where we distribute 25% to 50% of our net profit semi-annually. Maybe next time we will have a strategic discussion around this will be after the second half of the year. I do expect that the policy remains intact, but obviously we need to be guided, as you point to, by the facts at the time. With what has been laid out so far in our presentation and our expectation, I would expect that we will be evaluating whether to distribute at that time, buy back share or a dividend payout.
Alternatively, of course, look at are there still capital needs that we need to go through at that time. With, with this in mind, I do expect that, depending on the results, that clearly in next year, in 2020, it will be much more clear what we are gonna be doing, and maybe, as you point to, we need to have more of an evaluation in the upcoming, second half of 2019.
Mm-hmm. That makes sense. Just to follow up, to be clear on the timing: you would have the discussion post, the 4Q results, which based on your bookings so far, would indicate profit. Would that be like a February board meeting with a March payment, or would it be kind of a second quarter payment as part of the semiannual policy?
I think on this occasion, it will actually be something we will evaluate at the AGM that we have in April.
Okay. All right. Thank you. My second question has to do with the scrubber retrofitting. I understand the thought process behind delaying it, given the strength of the market, but you'd also mentioned some delays. We know that you have a percentage ownership of a scrubber manufacturer, so maybe incorrectly, I assume that if there were delays, you'd still be at the front of the queue. Can you talk about how much the delays played into your decision to delay delays at the yard, played into your decision to delay the timing of the retrofitting versus the strength of the market? Is there any compensation that you get or maybe savings from pushing back the timing on those?
Yep, very good. to be clear, thanks, John. Number one, the delay is not on the production of the scrubber. Actually, our production, as you point to, is going according to plan. We have no delays, and the scrubbers are ready. The delay that we are experiencing is more of a general nature, that larger vessels that are planned to have scrubbers are competing with other ship segments. That means that you have, basically, across the global fleet, you have large container ships, you have the Capesize, as you've got the VLCCs, all the segments you know well, basically competing for a limited number of shipyards that cannot accommodate larger vessels. The delay we have, to be very precise, is on our LR2s, LR1s.
We've seen that there is delays, of getting the scrubber installed, not the production. We are not experiencing the same type of delays on our MRs. There, the number of yards that are available to us and others is significantly higher, simply because of the dimensions of the vessels.
Okay, that's very helpful. Thanks, Jacob. Final one.
Around delays, there was one example where we had to sort of the choice on one of our LR2s to either go into a potential dock, where we would be installing and retrofitting a scrubber, and that the alternative market was, at that time, around $80,000. That was kind of a very easy decision to say, "Okay, let's take the money on the table and then let us delay.
Yeah, it's a case-by-case basis.
Exactly
... mostly on the larger ships. It was a yard issue. Final question for you, in very detailed view on the market and especially your expectations of the IMO impact, which we obviously agree with. Outside of a global macro, you know, recession, which seems maybe that's even the odds of that are lessening a little bit, what concerns you that maybe we don't get the cycle as it's laid out right now? I mean, the order book really can't change. Is it maybe the IMO 2020 impact isn't as large as we anticipate? Is there some other issue on regional trade? What could possibly go wrong next year outside of a macro demand event that can kind of throw off this really good setup?
Yeah. Of course, we all have to play out the scenario. I think a scenario which I do deem to be unlikely, but which could spoil the party here, would be that the refinery side gets their act together faster on the production of VLSFO, so that you basically, our theory and thesis around that, there will not be sufficient compliant 0.5 VLSFO available from the refinery side, and that will lead to incremental demand for transportation of diesel-based refined products. If that thesis should be wrong, i.e., that there is sufficient VLSFO to supply the market, then shipowners in general will obviously opt for that since it is cheaper.
Understood. All right. Thank you very much, Jacob.
That's a curveball that you would have in the market. I don't see that as a. If I look at the data points that we get from independent sources, this is not how it's playing out. Of course, if it did, that would be, I think, the party spoiler.
That's a good, it's a good way to think about that. Thank you very much for your insight.
Thank you.
Thank you. The next question is from the line of Espen Landmark from Fearnley. Please go ahead.
Hey, good afternoon. Just to follow up on the last one there. I mean, we had big refinery maintenance in the spring, and we have big refinery maintenance now in October. I think Thomas just said, you know, with more than 10 MMbbl . And the U.S. crude runs, you know, they're trending lower year-over-year. I think the station last week was, you know, low 85.5. It seems a bit strange seeing the crack spreads and, you know, the price differentials that we're seeing at the moment. I guess the question is, you know, are you concerned that some of this maintenance, you know, might reflect something else, just, you know, like lack of demand?
We've not really seen anything to that effect so far. Obviously, I think to your observation, we need to follow that. Clearly, in the trading patterns that we've got and the data points we have, we are not seeing an indication of that is the fact. Yeah, time will tell whether it's one or the other. We do see it as a general normalization.
All right. On page nine, you're kind of decomposing the bunker usage next year, you're also quantifying how much you think will be diesel, which I think is interesting. You know, it's still early on, but, you know, any insight into what you're seeing of demand of compliant fuel at the moment? You know, what kind of split of a 0.1% and 0.5% blends the shipowners are, you know, wanting?
I think it's too early. In our case, the preparatory work that is taking place on the shipowner side right now is that I think everybody is preparing to clean the tanks to shift into a VLSFO, either 0.1 or 0.5. The number of vessels, for instance, in our fleet, that has already taken on board these products, is very much on the margin. I think this is the test phase, and by early part of next year, we will know much more about the demand picture, whether it's 0.1 or 0.5. I think everybody is preparing, but it's not really ramped up the demand in the marketplace in general yet. It's too early.
Okay. Maybe finally, you know, a bit around the current spot market. It's always a bit difficult assessing the prevailing rates, especially on the LRs. You know, the fixtures you're seeing at the moment, would you say they are, you know, materially different from the four key bookings?
Actually, I did, before this call, I checked up on that, Espen, because I think it's a very relevant question. As of date, the bookings we have is actually almost spot on, the average that we have so far.
Okay. That's maybe as a quick follow-up on that, I mean, just to make sure, you said, you don't expect any kind of impact on TCE performance from having, you know, a lot of ships in the east, with scrubber installations?
No. We cannot point to the our earnings are negatively impacted on the vessels that we are employing, from scrubbers. What we can see is, obviously, that we have by definition, fewer operating days that we can that we have as earning days.
Okay.
Because of our product.
Thank you.
Yeah.
Perfect. Thank you, Jacob.
Thanks. Thanks for the question.
Thank you. If there are any further questions, please press star and one on your telephone, and it's the hash key to cancel. That's star and one to register any questions today.
We have, in the meantime, we have one question from the web, which is, where it reads here: Based on the current new building prices, are you looking to order new vessels in order to continue fleet renewal of your fleet and potentially renew the 36 vessels not scheduled for scrubber retrofit? I think in general, we are always looking to have a fleet maintenance program. We've done that over a continuous period, where we take in younger vessels into the fleet, and we dispose off older vessels. We don't have a big program where we would take out a significant number of vessels and then substitute them by new vessels.
The answer to this is that, no, we have a balanced approach, where we year by year evaluate what is, the best operational fit in our fleet.
There are no questions on the phones at the moment.
Okay, thank you for that. There are no further questions on the web. With that, we'll conclude the earnings conference call for the third quarter of our 2019 results. Thank you for participating.
Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.