Title

Presentation

TORM plc beats earnings expectations. Reported EPS is $1.35, expectations were $1.22.

Operator: Hello, my name is Audra and I will be your conference operator today. At this time I would like to welcome everyone to the TORM Third Quarter 2024 Results Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] At this time, I would like to turn the conference over to Jacob Meldgaard, Chief Executive Officer. Please go ahead.

Jacob Meldgaard: Thank you and a warm welcome to everyone joining us on the call today. This morning we released our third quarter results and I’m pleased to share that TORM has once again delivered a strong financial performance. Let me start by highlighting some of the key takeaways for the quarter. Our time charter equivalent earnings rose to US$263 million and EBITDA amounted to US$191 million although freight rates have been lower than expected in the last part of the quarter. We continue to see the market dynamics we’ve experienced in recent quarters driven by ongoing geopolitical tensions from both the Ukraine-Russia conflict and escalating issues in the Middle East. These factors have resulted in vessel rerouting, longer voyages and higher ton-mile demand, contributing to a tight supply-demand balance in the product tanker market.

However, in the quarter we have also seen that a significant part of the increased CPP volumes has been carried on uncoated VLCCs and suezmaxes and this has shifted the balance and put a temporary cap on rates. Looking ahead, we believe the key fundamentals supporting a positive rate environment will remain in place, although we recognize that the market is very susceptible to changes in both the geopolitical scenario and potential cannibalization from crude carriers. As mentioned by our CFO back in August we acquired eight second-hand MR vessels for US$340 million in a partly share based transaction. These vessels built at Hyundai Mipo Dockyard between 2014 and 2015 are part of our ongoing program to replenish our fleet and so far we’ve taken delivery of six of the vessels and are expected to take over the remaining two before the end of the year.

With this strategy, we believe TORM is set to continue to create significant value for our shareholders also in the years ahead. It’s been a profitable quarter and in line with our policy of distributing excess cash flow after debt repayment, TORM has declared a dividend of US$1.20 per share for the quarter, adding to the strong dividend flow seen in recent periods. Now please turn to Slide 4. Now, for almost three years, geopolitical tensions, first in Europe and since then in the Middle East have driven product tanker rates to a new higher average level. At the same time, we’ve also seen increased volatility in rates as fleet utilization has moved closer to full utilization. However, in recent months we’ve seen a decline in rates as short term factors such as intensified crude tanker cannibalization have softened the positive impact from geopolitical factors.

And here kindly turn to the next slide, turn to Slide 5. If we start with a bigger picture, the main impact of the geopolitical tension has been a reshaped product tanker trade towards longer distances. The sanctions against Russia in 2023 led to a trade rerouting towards longer haul trade, both for European imports, but also for Russian exports. This year the product tanker market has been strongly affected by the Houthi attacks against commercial vessels at the Bab al-Mandeb Strait. The share of global clean petroleum products trade transiting the Suez Canal had declined from 12% to only 4%, with most of the redirected trade going a longer route around the Cape of Good Hope. Please turn to Slide 6. If we look closer at seaborne trade with clean petroleum products, trade volumes have increased by 2% so far this year, supported by increasing global oil demand and recent changes in the refinery landscape.

Together with longer trading distances, this has led to an overall 10% increase in ton-mile demand. Actual loaded volumes have though been trending down over recent months and fell to below a year ago levels here in October. One of the regions affected has been the Middle East, where exports have fallen by 8% month-on-month in October. Given the region’s market share of around 10% of the global CPP exports and the fact that the Middle East exports to the west is one of the traits most affected by the Red Sea disruption, this of course, has had a strong impact on our market. Nevertheless, we’ve started to see improvements in refinery margins in some regions that should support higher refinery runs and demand for transportation. A lot of talk on the oil market in recent months has been about China’s disappointing growth in oil consumption.

While the effect of the recent government stimulus package has yet to show in oil demand it is also important to point out that for the product tanker market, China’s market share is below 5%. However, China is important for us indirectly as China accounts for around 25% of global crude oil flows and hence has an impact on the crude tanker market. Please turn to Slide 7. The unusually large spread between product and crude tanker earnings that we saw earlier this year led to a cleanup of a number of VLCCs and Suezmaxes since the end of the second quarter. These accounted for 9% to 10% of the clean petroleum product ton-mile here in the third quarter, offsetting a large part of the incremental ton-miles. However, a seasonally improving crude tanker market is reducing incentives for crude cannibalization.

This is already seen in both the volume of crude oil trade in the first month of the fourth quarter, but also in the sharp decline in the volume of clean products being loaded on crude tankers. While CPP trade volumes are yet to increase after refinery maintenance season and run costs, the headwinds from the crude cannibalization have reduced so far in the fourth quarter. Please turn to Slide 8. On the tarnished charter side, we’ve seen an increase in newbuilding activity this year with the order book currently standing at 22% of the fleet. As we pointed out earlier, newbuilding activity has largely concentrated around the LR2 segment. Given the versatility of the LR2 fleet which can trade both clean and dirty products, the LR2 order book should be seen in connection with the dirty Aframax order book.

The combined order book is currently at 18%, which is more or less equal to the share of combined fleet being candidates for scrapping. A similar trend is seen in the entire products in the fleet. In fact, the average age of the fleet has not been as high as it is today in two decades. With 14% of the fleet about 20 years old, this will potentially offset a large part of the fleet growth in the coming years. Should a strong freight market result in less than expected scrapping activity, as we’ve seen in the past two years, we still expect older vessels to leave the mainstream market and go into sanctioned or cabotage trade. Furthermore, we see that as vessels turn towards 20 years of age, their average utilization drops significantly compared to younger vessels.

That would lead to a growing share of the fleet operating at a lower utilization. Now we turn to the next slide. Please turn to Slide 9. Looking further ahead in time, we expect the product tankers delivery from 2028 onwards to be much lower than what we are going to see for the next three years. This is predominantly due to Chinese shipyards opting to build container vessels, LNG carriers and other vessel segments where China has strategic import interests. This coincides with a period where an increasing share of the fleet reaches a natural scrapping age. Please turn to Slide 10. And on this slide, lastly, I’ll say that behind the geopolitical factors that have reshaped refined product trade, there is a refining industry influx. In recent years, new refining capacity has been added in net exporting regions such as the Middle East.

On the other hand, a number of refineries have been closed in net importing regions, for instance, Europe and Australia. This has led to higher trade volumes and higher demand for product tankers. Beyond the already announced closures, the refinery environment remains dynamic. The risk of falling refinery utilization rates in mature demand regions raises the likelihood of further capacity closures before the end of the decade. Here, especially Europe stands out with older relatively small and less complex refiners that are more open to international trade than in other regions. A new wave of refinery closure is likely to again increase trade with refined products. And just a final note on the market, we believe that Trump’s presidency is likely to imply less restrictions on the U.S. oil industry and with potentially stricter sanctions against Iran that would be a supportive factor for the crude tanker market.

It remains obviously to be seen, but we expect U.S. oil imports to be shielded from potential tariffs in order to keep gasoline prices under control. On the geopolitical landscape, Trump is likely to push for a faster resolution of the Ukraine-Russia war. However, the prospects for success for Trump in negotiating a settlement remain uncertain. What matters most for the tanker market is the EU sanctions, and we do not foresee a quick abolishment of these or a full return to pre-war oil trade between the EU countries and Russia. However, with Trump’s more aggressive approach to geopolitics and trade policy, uncertainty on the tanker market as well as in the global economy is likely to increase in the coming years. Now with these comments, I conclude my part of the presentation.

I’ll hand it over to my colleague, Kim, who will walk us through the financials.

Kim Balle: Thank you, Jacob. Now please turn to Slide 11 for the financial highlights. In the third quarter, TCE amounted to US$263 million. And based on this, we achieved US$191 million in EBITDA and US$131 million in net profit, i.e., slightly up compared to same quarter last year. Fleet-wide, our average TCE rates were close to US$34,000 per day while LR2s putting in close to US$41,000, LR1 set over US$33,000 and MRs at more than US$31,000. While rates were strong early in the quarter, they softened significantly in September due to seasonal factors as well as crude tankers taking some of the additional ton-mile demand. Overall, we had 8,253 earning days this quarter, up from 7,949 days last year, with LR2s making up a larger share of the total.

We are proud of these results, which reflect a TCE rate per day increase of US$700 compared to Q3 2023. Moreover, our return on invested capital amounted to 20.3%, demonstrated a very healthy business environment in the third quarter. Once again, our business is developing substantially profit and cash flow, and we are committed to continuing our practice of returning a significant portion of these earnings to our shareholders. Now, please turn to Slide 12. The chart in the upper left corner show how vessel values have steadily risen over recent quarters, bringing the total value of up to US$3.9 billion. The growth in net asset value mirrors broker valuations of our vessels as well as the expansion of our fleet. On the lower left, we’ve highlighted the trend in our net interest-bearing debt, which now stands at US$825 million, i.e., flat relative to the same quarter last year despite the fleet expansion that we’ve made.

Right now, our net loan-to-value ratio is at 23.1%, i.e., lower than the same quarter last year. And after subtracting the declared dividend for Q3, it will move closer to 26%, maintaining a solid financial foundation as we move forward. And now, please turn to Slide 13. Based on the result in this quarter, the Board of Directors have declared a Q3 2024 dividend of $1.20 per share, and as usual, we arrived to this dividend by subtracting repayments of debt from our free cash flow and relative to basic EPS, this equals a payout ratio of a healthy of 89%. This slide gives you the full overview of the dividend distribution and the key days to observe ex-dividend date for the shares on NASDAQ Copenhagen will be on the 20 of November and for the shares on NASDAQ New York on the 21 of November and shares are now trading T+1 in New York, but otherwise, the same procedure as usual.

And now please turn to Slide 14 for the outlook. Based on the results we have published today and the coverage we have for the fourth quarter of 2024, we have close to full visibility for the year. The table shows that in the fourth quarter of 2024, we expect to have 8,086 earning days. And as of 4 November 2024, we have fixed a total of 52% of those at a fleet-wide rate of US$29,044 per day. Compared to the current spot rates, this reflects – this is relatively high, thus you – if you assume that some will achieve rates in line with the current spot rates for the remaining part of the quarter, then the fleet-wide rate will be affected accordingly. Thus, for the full year, we are now at 87% coverage at a fleet-wide rate of $38,379 per day.

This compares to 2023 fleet-wide rates of US$37,124 per day, i.e., underscoring what looks like to be an overall very satisfactory year with average rates for each segment close to last year’s levels. As you may recall, three months ago, we narrowed our guidance range by increasing the lower end of the guidance range. This time, we primarily bring down the high end of the range, thereby taking into account the current spot rate environment. Thus, we expect TCE earnings for 2024 of US$1.11 billion to US$1.16 billion and EBITDA of US$810 million to US$860 million. And now please turn to Slide 15 for a short summary of our priorities and commitments. We continue to maintain a strong cash position, which provides us with significant financial flexibility enable us to seize opportunities in the markets when they arise.

Our debt maturity profile remains secure, creating long-term financial stability that is essential as it allows us to focus on executing our strategies without concerns of any major debt refinancing. It also provides comfort to our investors knowing that our financial obligations are well-managed and spread out over a period of time. We have no major CapEx commitments at the moment, and this enables us to be more agile and responsive to market conditions, focusing on investments that generate higher returns. We have successfully enhanced our operational leverage, allowing us to capitalize on favorable market dynamics in the previous quarters. Leveraging these dynamics allow us to optimize performance and stay competitive. We’ve continued to take a prudent approach to financial leverage by using share-based funding for our recent vessel acquisitions.

This ensures that our net loan-to-value ratio remains unaffected, which is important for maintaining our strong financial health. By structuring these deals in this way, we have expanded our fleet without increasing our financial leverage, keeping our balance sheet strong. And finally, we remain fairly committed to delivering value to our shareholders. Consistent with our strategy, we are distributing 100% of free cash after debt repayments on a quarterly basis. This ensures that our shareholders continue to benefit from our financial performance, reinforcing trust and confidence in our long-term business model. With this, it concludes my part of the presentation, and I will hand it back to the operator who will take care of the Q&A session.

Thank you.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We’ll take our first question from Emily Harkins at Jefferies.

Emily Harkins: This is Emily on for Omar. Thank you for taking our question. I’d first like to ask how are you thinking about the product market thus far into 4Q, the cannibalization by the VLCCs and Suezmaxes impacted product tanker demand in 3Q, but those ships are now going back to their normal trades. However, product rates have fallen. So what do you make of that?

Jacob Meldgaard: Yes. Good morning Emily. Thanks for bringing up that. So I think we tried to illustrate also in the prepared remarks that we think that Q3 was affected by crude cannibalization and that is more or less so far, at least a Q3 story. So we are seeing that here in the fourth quarter there is no over and above utilization of crude tankers in the CPP trade from what we would normally experience. So there’s a normalization taking place. So why have rates not reacted well? At least as I mentioned, one factor to look at is that the absolute volumes out of the largest market for – of exports of CPP globally is the Middle East, and that market we can see that actual volumes here in October fell by about 8%. So I think it’s quite logical that yes, we’ve had a dent from cannibalization from the crude carriers that is not so much longer the case.

However, when you then prolong sort of the softness in the rate environment by the fact that we have lower volumes to transport. So one softening of rates could be seen as a factor of supply, whereas the current softness in rates we would attribute more to the demand having been lower due to refinery outages and refinery maintenance.

Emily Harkins: Thank you so much. And as a follow-up, you tended to be active with fleet renewal on an ongoing basis, including the 8 MRs that you mentioned that you acquired this past summer. Do you have your eyes set on more transactions? Or do you prefer to take a wait and save approach given the softer market now?

Jacob Meldgaard: I think it’s clear that the buyers and sellers in a market where we’re sort of reestablishing where we headed that we need to see new sort of clearance prices of assets before we can actually engage both on buying or selling of assets. So far there’s not much actual transactions taking place. So I think we are staying agile. We could do either or we could be in dialogue potentially on acquiring share-based cash – share-based transaction further assets. But we could also potentially of course look at letting go and selling of assets. Currently there’s no specific plans around this, Emily.

Emily Harkins: Thank you so much. I’ll turn it over.

Jacob Meldgaard: Thanks.

Operator: We’ll go next to [indiscernible] at Clarksons Securities AS.

Unidentified Analyst: Thank you. Just building on the previous question here, you’ve previously been successful at use lighting your share less currency in vessel acquisition, which was great and a creative way to grow while keeping the LTV stable when you were priced at sort of a higher level. But with the recent, I would say with the product anchor space trading down recently, how are you thinking about sort of this strategy going forward?

Jacob Meldgaard: I think thanks for that. And to be very clear, we don’t see that as a very potent tool in the toolbox given the current discrepancy between the public market pricing and our NAV. So to your point, if the snapshot that we see today of the price in the public market would persist, then it’s not realistic for us to contemplate the type of deals that we, for instance did earlier this year and also last year. I think something needs to give before that would be on the – on the table again.

Unidentified Analyst: Okay, thank you. I’ll return to you. Thank you.

Jacob Meldgaard: Thank you.

Operator: And we do have a follow up from Emily Harkins at Jefferies. And Ms. Harkins, your line is open. Please go ahead.

Emily Harkins: Oh, sorry, I don’t have a follow-up.

Operator: Okay, thank you.

Operator: I’m – no further questions. That concludes our Q&A session. And we’ll now turn the conference back over to Jacob for closing remarks.

Jacob Meldgaard: Yes, thank you very much. Thanks for listening in here to the Q3 2024. Wish you all a great day. Thank you.

Operator: And this concludes today’s conference call. Thank you for your participation. You may now disconnect.