Earnings Call: Q1 2021

May 12, 2021

Good day and thank you for standing by and welcome to the TORM's First Quarter Results 2021 Conference Call. Currently, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Martin Alkrupp. Your line is now open. Thank you, and thank you all for dialing in here, and welcome to TORM's conference call regarding the results for the Q1 of 2021. My name is Morten Nattrop, and I'm Head of Corporate Finance and Strategy here at TORM. As usual, we will refer to the slides as we go along and 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 usual Safe Harbor statement. Slide 3, please. The results will today be presented by Executive Director and CEO, Jacob Mellgaard and CFO, Kim Bele. I will now hand the call over to Jacob. And here, please turn to Slide 4, and thank you very much, Morten. Good afternoon to all. Thanks for dialing in. I'm happy to be here. Today, we published our results for the Q1 of 2021. And I'm, of course, also quite pleased because we, this morning, have announced the acquisition of 3 LR2 vessels. The Q1 of 2021 was impacted by the continued market downturn and the COVID-nineteen pandemic, which lowered the global demand for oil products. For TORM, the quarter ended with an EBITDA of $19,000,000 and a loss before tax of $21,000,000 As a consequence, return on invested capital was negative at 2.7%, which, of course, is unsatisfactory. Our product tanker fleet realized an average TCE rate of almost $13,500 per day. And in the largest segment, the MR segment, the achieved rates were just below $13,000 per day. Now looking into here the Q2, we've secured bookings at almost $15,000 per day, and we are looking into a stronger result then realized in the Q1 with now 78% of our earning days already covered. During the quarter and as we previously announced, we purchased 8 MR vessels in our Bartley share based transaction. And adding to this fleet increase, we have today announced the purchase of 3 modern LR2 scrubber fitted vessels For a total consideration of $121,000,000 Lastly, we have after the quarter ended also Sold 1 older MR vessel. These S and P transactions are all part of our Coverage and S and P strategy that we pursued over the last year and that I will elaborate on here on the following slide. So please turn to Slide 5. 2020 was a special year also for product tankers impacted by the global pandemic and the related close downs. The product tanker market was divided into a brilliant first half and you have to say And not so flattering second half, resulting the year ended at loss making freight rate levels. As I mentioned, The downturn from the second half of twenty twenty has so far continued here into 2021. During this period, we have actually managed our market exposure. So first, in the sale and purchase market, We capitalized the strong market during the Q2 of 2020 and sold 7 older vessels. This decreased our market exposure through the market downturn that followed. Over the recent months, During this market downturn, we've decided to take on additional exposure through the purchase of 8 MR vessels and most recently these 3 LR2 vessels. This total of 11 vessels will all be delivered during the second and the third quarter of 2021. Now in terms of employment strategy and coverage, we also conducted a number of activities. In the anticipation of a market downturn, we increased our coverage from the Q2 of 2020 onwards. This was done through uses of both time charter employments and freight derivatives. Especially For the first half of twenty twenty one, we decided to take additional cover. And as of today, we have covered almost the entire LR fleet For the remaining Q2, the cover runs off over the year down to around 50% here in the 3rd quarter and around 20% in the 4th quarter. Similarly for the MR vessels, we've covered 71% of the days here remaining in 2nd quarter, which will reduce gradually to 22% coverage for the 3rd and 10% coverage for the 4th quarter. The increased spot exposure and the delivery of the 11 vessels will add to our operational leverage and support our future performance. Now let me turn to some of the drivers in the underlying product tanker market. And here, please turn to Slide 6. Now more than a year into the COVID-nineteen breakout And global pandemic. The product tanker market continues to be affected by local breakouts and lockdowns. This year started with renewed lockdowns, especially in Europe, but also in parts of Asia due to a second wave of COVID-nineteen cases and the emergence of a new, more transmissible variant of the virus. This resulted in a temporary reversal In oil demand recovery and strengthened the short term headwinds for the product tanker market, which was further aggravated by the very weak Crude tanker market, leading to increased crude cannibalization and LR cleanups. The extremely cold weather in United States nevertheless resulted in increased transatlantic flows As well as long haul East to West flows, which sent LR2 spot rate benchmarks temporarily above $20,000 per day. Since then, several countries in Europe have started to open up again, while in the U. S, we are seeing really good progress in vaccination rates, which has already started to show in all demand figures as well. Unfortunately, we have recently seen a dramatic increase in COVID-nineteen cases in India, which, of course, has made us increasingly concerned with the health of our colleagues in India And which is causing operational challenges for the shipping industry as a whole. I'll touch upon this a little later in the presentation. But for now, please turn to Slide 7. As we've been emphasizing for some time now, 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 drawing phase ends. It's difficult to estimate the exact timing, but the inflection point is expected to be reached once more people get vaccinated, Countries reopen and the demand recovery gains momentum. Slide 8, please. As already mentioned, renewed lockdowns have negatively affected oil demand recovery in recent months, Especially Europe was hard hit in the beginning of the year, where we have seen oil demand declining compared to the level seen at the end of last year. Nevertheless, we remain confident that with accelerating vaccine rollouts, The virus gets under control and the affected countries can reopen, leading to a wider recovery in the macroeconomic activity And oil demand. And indeed, if we look at the recent developments in the U. S, the vaccination rate has shown strong progress and latest oil demand indicators show improvements towards the pre COVID-nineteen levels. It is most likely That there will be a difference in how fast different regions will progress with vaccinations, and many developing countries might lag behind here. But I think that we can assume that Europe will reach some sort of immunity over the summer and together with China, Where oil demand is already back and above pre COVID-nineteen levels as well as United States, these regions Together, cover as much as half of the global oil demand. Please turn to Slide 9. Since the end of Q3 last year, India has seen significant improvements in oil demand. However, Recently, we have seen a dramatic increase in COVID-nineteen cases in the country, which is indeed a very concerning development with respect to our colleagues in India as well as the country's total population. The situation in India It's also causing operational challenges as several countries have imposed restrictions on ships that have made port calls in India. And as a consequence, some ship operators are no longer willing to call Indian ports. We are, Of course, carefully monitoring the development, but we do expect to be able of fully maintaining operations also through this difficult period. From the oil product trade perspective, the current situation in India will likely not be a negative factor. Judging from India's mobility indicators, new restrictions in several regions will have a significant effect On the country's demand for transport fuels and taking into account the country's status as a net product exporter, We will potentially see increasing flows of surplus products from the country in the coming months. Now please turn to Slide 10. And here, let me come back to the United States. I think it's an example of a country where vaccinations have, as I said, shown a significant progress. We've seen improvements in the U. S. Oil demand indicators along with the fact that almost 60% Of the adult population in the country has commenced vaccinations. Demand for core products such as gasoline And diesel has shown significant improvements since the beginning of the year, with diesel demand actually already above seasonal pre COVID-nineteen levels, While gasoline demand has climbed from 14% below the 2019 levels at the start of the year to currently around 5%, 6% below the 2019 level. Jet fuel demand is still well below pre COVID-nineteen levels, but Even here, flights traveler figures show significant improvements. With these demand improvements and taking into account refinery capacity removals in the United States East Coast in recent years. We are already seeing signs of higher import needs to the region ahead of the summer driving season. And with the recent cyber attack on the Colonial Pipeline, near term imports If we look at the latest floating storage and onshore inventory data, we can see that floating storage is more or less back to what we consider a normal level. And global onshore product inventories have come down from the peak excess levels seen last summer. As a result of the refinery outages in the U. S. Gulf in connection with the extremely cold weather in February, Product stocks there even fell to below normal seasonal levels here in March. This suggests that Much of the stock drawing is behind us, meaning less headwinds for the product tanker market once the demand recovery gains momentum. Please turn to Slide 12. If we look at the more medium- to 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 down and another 1,000,000 barrel per day potentially at risk of closure. Most of this capacity It's located in regions which already are large importers of refined oil products such as Europe, U. S. West Coast, 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 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 New Zealand, the figures are even more significant. 2 out of 4 refineries In Australia, closing down and the sole remaining refinery in New Zealand is most likely to be closed down as well. At the same time, approximately 5,000,000 barrels per day of new capacity is scheduled to come online mainly in the Middle East and China, The regions that already today are large exporters of Royal Products. Both these developments are positive for trade flows In the post-nineteen world, there are only a few products which are not positive for trade, most notably The Dalgohle Refinery in Nigeria. Slide 13, please. The positive outlook for the demand for product tankers in the next 3 to 5 years coincides with the supply side, which is at the most supportive for the last 25 years. The order book To fleet ratio for product tankers has remained at around 7% for some time now, which is historically a low level. The recent record high newbuilding ordering in the container segment has filled up shipyard capacity And made it more difficult to order product tankers with delivery before 2024, which is further supporting the case of a Quite modest fee growth in the next 2 to 3 years. As a consequence, we expect net fee growth in the next 2, 3 years At around 2% a year, only half the pace seen in the past 5 years. To conclude our remarks on the product tanker market, Thorm expects to see volatility in the market in the short term related to COVID-nineteen and its 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 remain positive, such as, as mentioned, the refinery dislocation and the low order book, which will provide underlying support to product tankers over the longer term. Following the market dynamics, I believe TORM is well positioned to both maneuver and utilize the opportunities in the current lower market environment through our strong capital structure. I further believe we're well positioned to utilize the coming market strength through our operational leverage and our integrated platform. Please turn to Slide 14. Looking at Thorm's Commercial performance. I'm pleased that we again here in the Q1 of 2021 in our largest segment, the MRs, have outperformed the peer group average. In the Q1 of 2021, we achieved rates just below $13,000 per day compared to a peer average of $10,337 per day. This translates into additional earnings of $12,000,000 In general, I am very satisfied that Thorm's operational platform continues to deliver competitive TCE earnings. Slide 15, please. A key designing factor for delivering this above average TCE It's driven by our continued focus on positioning of our vessels in the basins with the highest earning potential at any given time. In the Q1, we had a slight overweight west of Suez, with the general market actually being at relative similar levels across These main basins when we look at the full quarter. Now I'll hand it over to you, Kim, for further elaboration on our Operational leverage, the cost structure and not the balance sheet. Kim? Thank you, Jacob. Please turn to Slide 16. With our spot based profile TORM has significant leverage to utilize an increase in the underlying product tanker rates. As of 31st March 2021, we had just about 14,000 open earning days in 2021 and almost 30 1,000 earning days in 2022. Adding our just published LR2 purchases to these numbers, The earning days will increase with around $1,000 on an annualized basis. For the nearer term, we have, as Jacob has mentioned, however, deliberately Increased coverage over the last year in anticipation of a continued downturn in the market. And for the Q2, we have covered 78% at almost $15,000 per day. Please turn to Slide 17. As part of our coverage strategy, We use a combination of freight rate derivatives and physical contracts. These freight derivatives have the advantage of providing flexibility in In relation to precise timing and size of coverage and during 2020 and throughout the Q1 of 2021, We have benefited from the use of derivatives with a total realized amount of US12.2 million dollars However, the market value Development is booked in Thorms, TC, and we have over time seen fluctuations in our result as driven by changes in the unrealized element of these derivatives. To amplify, by the end of March 2021, the unrealized element of Thorm Freight derivatives had a negative market value of US7 $1,000,000 The value then increased during April, resulting in a positive impact of $5,700,000 which was then booked in our TCE during April. Please turn to Slide 18. I would now like to review Our financial position in terms of key metrics such as net asset value and loan to value. Vessel values have decreased slightly during the Q1 by around 2% With a positive momentum towards the end of the quarter and into the Q2, the value of Thorm's vessels, including newbuildings and committed secondhand purchases It was just around $1,700,000,000 by the end of the quarter. Outstanding gross debt amounted to $858,000,000 as per 31st March 2021. Finally, as per 31st March 2021, we had outstanding committed CapEx of US210 $1,000,000 related to our new billing program and the MR secondhand vessel purchase. This includes a non cash element of $55,000,000 So our cash position was $170,000,000 The net asset value is estimated at $788,000,000 as per 31st March And this corresponds to DKK10.6 or DKK67.1 per share. And just before commencing this call, Thorm's share was trading at just below DKK 53. I'm pleased that our strong balance sheet has provided us with the strategic flexibility to increase our fleet over the past month With a total of 11 secondhand vessel purchases. On the following slides, I'll give some insights into our liquidity position, CapEx commitments and our debt profile. Please turn to Slide 19. As of 31st March 2021, TORM had Available liquidity of $329,000,000 cash totaled the $117,000,000 and we had undrawn credit facilities of $212,000,000 Including the committed and expected financing related to the LR2 purchase and the 2 additional sale and leaseback agreements, total pro form a available Liquidity was $446,000,000 The total cash CapEx commitments relating to our new buildings and the MR secondhand vessels Purchases were $155,000,000 as per 31st March 2021. This excludes the share based payment related to the MR purchase. Including the purchase of the 3 LR2s, the total pro form a CapEx commitment stands at $276,000,000 With Thorm's strong liquidity profile, the CapEx commitments are fully funded and very manageable. Please turn to Slide 20. After having finalized the refinancing last year, we have eliminated all major refinancing until 2026, which provide us With financial and strategic flexibility to pursue value enhancing opportunities in the market. As displayed, We do not have any major repayments until after 2025. With that, I will leave the operator open up for questions. And our first question comes from the line of Jon Chappell from Evercore. Your line is now open. Thank you. Good afternoon, everybody. Kim, if I could start with you. The liquidity situation Seems fantastic. There's no big debt amortization coming up. You seem to be getting debt financing for all the purchases that you've made and you have a very optimistic view on the market. I'm just curious why continuing to do sale and leasebacks, which would be higher cost debt by definition. It's one thing to do it for the 3rd LR2 you're buying, but then you're adding 2 more ships in the existing fleet from what I understand. Is there a reason that sale and leasebacks are still necessary given the outlook for the market and your liquidity situation? Is this the bank financing not available at the size that you need? Just trying to understand maybe the difference there. Thank you, John, for the question. Very good question. We have a group of relationship financing institutions, banks as well as different leasing partners. So as such, we are trying to make using our partnerships, but also establishing a well diversified Funding platform. So as you can see, we have with the LR2s financed through DSF and then Further via a share leaseback scheme. So, it's basically to build up a diverse platform of different funding With the pros and cons there on each of those. And just correct me if I'm wrong, but are you adding 2 more ships as part of the sale new stock for the 3rd LR2? Yes, that's correct. We had the opportunity to do so. Yes, basically to first We had the opportunity on pretty good commercial terms to add the 2 further vessels. And then you know us On sort of liquidity and balance sheet, from a liquidity and balance sheet perspective, we like to be Conservative, so having that opportunity, we just added those also, as I said, on quite decent terms. Okay. And then the second thing I want to ask about and thanks for clarifying the freight derivatives. When you see something like 112% of the 2nd quarter LR2 days are covered, you start to scratch your head a little bit. Just curious on your nimbleness and flexibility around that. I It sounds like the majority of them will roll off in the second half of the year. You have a far more optimistic view about the market despite some choppiness maybe for the rest of 2nd quarter, if you get to early part of June, mid June and you think this may be delayed, the recovery may be delayed for another quarter or 2 for whatever the Case maybe, do you have the ability to kind of step up those derivatives or are those kind of optimally timed when the market was really at a trough And the opportunity to re up on those has kind of passed? Yes. So I think to your point, John, If it is so that there is a delay in the expected recovery, Then it would be too later. So we base our base case is that the fundamental recovery for the product tanker market will coincide, as I mentioned, With the rollout of vaccinations and reopening of societies at large, and that is over the course of the second half. The exact timing could be later than 1st July, clearly. But we are willing to take that risk Good right now. And I think that if you stood end of June and you had second thoughts about this, that's probably going to be too late as you point to. The positions we have now, we've taken some time ago. It's not new positions, obviously. Okay. Yes, that makes sense. All right. Thank you, Jacob. Thanks, Ken. Thanks for the questions. Have a good day, Joe. You too. Okay. Our next question comes from the line of Ulrik Back from SVB, your line is now open. Hi, Jacob and Kim. Also a few questions from my side. Firstly, in terms of your capital allocation, how do you internally evaluate how many vessels and how much debt to take on to your balance sheet Because you have now been acquiring 8 vessels in March and additional 3 now. So what is the yes, the capital allocation strategy? Okay. Just to clarify, perhaps and thank you for the question, Ulf. When we did the first 8, the Tim Tankers transaction that really didn't we really didn't need any liquidity To purchase those, those were partly share based transaction, sixty-forty. So that is quite it was quite nice transaction, well structured we found and we really like those kinds of structures certainly. So for that, no liquidity needed. And of course, in this case, with the 3 L2s, different scenario, We needed some liquidity and we put that in place with the financing as we have displayed. So of course, it depends on the specific structure That we are looking into. Okay. But would you still be in the market to purchase Additional tonnage? Or do you have is your fleet big enough for the upcoming recovery as So I think as Kim pointed, it will depend on the dealer. So there's Now over the course of this year, we've done 2 different type of structures. 1, where basically this Cash also and where the LTV that came with the team tankers were in line with our own LTV. So that's not really moving the needle On an aggregate basis, when you have 60% debt, 40% issuance of shares, it's different with the deal we have announced today. Here you are levering up. You are utilizing cash. And so the next deal, You could say, if we were to look at a new project, you would have to evaluate what type of structure it had. And I would lean towards That the next year would have to be more or less fully funded, I. E. Not taking away more cash until at least we're into a recovery. Okay, sir. No further questions at the moment. Please continue. Okay. Thank you. We don't have any questions from the web either. So we hereby end the conference call. Thank you all for listening in, and have a good day. Thank you. Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.