TRMD - Torm PLC- Q2 2023 2023 Results Conference Call

Thank you, Andreas. Good afternoon and morning to all. We're presenting the strongest second quarter in our history, continuing the performance from Q1. We realized TCE of $308 million and EBITDA of $237 million. Adjusted for $37 million in unrealized FFA gains, adjusted EBITDA was $199 million. Profit before tax increased 72% to $184 million compared to the same period last year. Return on invested capital was 33.9%. Our balance sheet remains strong with a net LTV ratio of 29% and available liquidity of $497 million. The board approved a dividend of $1.50 per share, distributing approximately $126.6 million in September. In the first half, we took delivery of all seven LR1 vessels and three MR vessels acquired earlier, sold one LR1 vessel, ending with 87 vessels at the end of June. We entered the Tango security program with the U.S. Maritime Administration — three of our MR vessels will participate, with undercover reflagging to the U.S. while continuing regular operations when not in the program. As of August 14th, we've covered 74% of Q3 at $30,534 per day, reflecting slightly lower market rates from the latter part of Q2 due to refinery maintenance, product stock draws, and lower demand. We expect markets to recover and a stronger fourth quarter.

Since the Russian invasion of Ukraine, we've seen a step change in product tanker rates toward higher averages, as sanctions led to trade flow recalibration toward longer distances. This brought higher volatility as the fleet moved closer to full utilization, where even small changes in demand and supply create high volatility in rates. In this environment, positioning our fleet toward premium trades and regions is even more important, and having access to the right customers and cargo combinations is essential. Our integrated platform continues to have strong customer support, and we remain confident in accessing the cargoes and trades that enable premium positioning. The geopolitical conflict and resulting EU ban on Russian oil products has been the most important demand driver for a year and a half. EU imports shifted from short-haul to predominantly long-haul, translating into a 40% increase in ton-mile despite 15% lower import volumes — a result of stockpiling ahead of sanctions and some oil demand weakness. Russia redirected clean products to Africa, Turkey, Brazil, the Middle East, and Asia, though Q2 saw some slowdown due to spring refinery maintenance. EU stockpiles have been drawn down to below average, giving a tailwind to the product tanker market. East-West spreads have widened to their highest since sanctions, likely encouraging increased trade flows amplified by seasonal diesel consumption ahead of winter. China increasing export volumes would be further upside. The market has rebounded in early Q3 with increased product flows from major exporting regions, encouraged by record seasonal refinery margins. Global oil demand reached an all-time high of 103 million barrels per day in June, driven not only by China but also by returning consumption growth in industrialized countries. Clean product volumes loaded on LR and MR vessels have rebounded from lower Q2 levels.

A considerable number of LR2 vessels have switched from clean to dirty trades since early 2023, reducing the clean trading LR2 fleet by a net 9%. However, as Aframax rates have weakened, some switching back may occur if Russian crude export cuts persist. Turning to fundamental drivers: we've long emphasized changes in the global refinery landscape, with closures in importing regions and new capacity in exporting regions, particularly the Middle East. Much of this new capacity concentrates on middle distillates, which we expect to drive higher long-haul diesel arbitrage flows. On the supply side, product tanker ordering has picked up, with the order book at 10% of the fleet. Critically, this is spread across 3.5 years of deliveries, translating to a 2.8% annualized growth rate. With shipyards booked for the next 2.5 years, any new orders won't deliver before 2026, and many involve yards that are newcomers to product tankers. In the second half of the decade, while more orders and higher deliveries are possible, this will coincide with significant scrapping potential from 2000s-built vessels reaching natural scrapping age. Net fleet growth could even turn negative. The combined product tanker and dirty MR order book is at 11%, compared with 5% of the fleet above 25 years old, and historically this segment has a lower average scrapping age of around 21 years. Up to 23% of the fleet could be removed in the next 3.5 years. In conclusion, main demand and supply drivers remain supported. Trade recalibration continues with new Middle East refiners ramping up. Q3 trade volumes are rebounding, and key indicators point toward further increases in longer-distance transport. The supportive supply side ensures low fleet growth for at least two to three years.

Good question, Jon. If we had the luxury of identifying assets that could contribute positively to the platform, currently the sweet spot is unchanged — vessels built between roughly 2007 and 2015. We think the market will be strong for at least a number of years, which leads us in that direction. Regarding the order book: yes, it's close to 10%, but what's unusual is that it's spread over such a long period — annualized at 2.8%. I don't see that changing in the initial three years. Investors are really placing their bets toward the end of 2026 into 2027. Cheaper capacity will be a scarce commodity because there's less availability, especially as Asian shipyards have restructured with reduced gross capacity. Shipyard capacity will also favor infrastructure-type products like LNG carriers, which are globally needed — for instance, to provide gas into areas like Europe previously dependent on Russian gas. So while I expect the order book to grow, I expect it to be quite manageable when you consider what's happening to the existing fleet in the second half of the decade.

That's a good question. I would look toward whether there's danger on the crude side — that crude transportation remains subdued. Aframax rates have been faring really well, and if that continues, it would encourage people to try to penetrate the clean market. So I think the jury is out on that over the next couple of months — that's one to watch. On China, I'm not so concerned. Right now we're not seeing a lot of clean exports available for our type of vessels, and that would actually be a tailwind. China can almost not be supporting the product tanker market less than they are now, given the very small export volumes. The potential for them opening up for more exports, given their economy, seems more likely than the other direction. So that would not be a concern to me.

That's a very good comment. We've already mentioned that more or less all capacity in the short to medium term has already been booked — what I would say are shipyards capable of delivering product tankers. That means you're looking at either Tier 2 shipyards that could potentially add a little to the order book, or really long-dated contracts delivering in late 2026 or 2027. The restructuring of the shipyard scene is benefiting the product tanker segment. Especially middle-sized Korean yards that 10 years ago were big contributors to the order book have either closed down or shifted focus. There are very few yards left focused on product tankers, significantly different from a decade ago. Secondly, there's still a need to build infrastructure projects — the LNG market being a strong example, with demand from both gas producers in the Middle East and importers in Europe to secure deliveries in 2026-2027. So while there will be more contracting, there's less supply of capable yards, and you're competing for capacity at the high end of shipbuilding. That gives me comfort that while the order book will rise, it simply cannot explode in the medium term.

Very different questions, but if we take consolidation first: the door is always open at TORM for a conversation. We're doing really well, and our peers are also benefiting from these strong currents. While I have an open invitation for consolidation, I'll say there is no exit dialogue. I think most investors in the current environment are pretty happy with their positions, so I don't expect a lot of activity on that front. On disposals: we utilize our vessels for as long as we get the last earnings from them on our integrated platform. We don't discriminate against age — we look at what gives us the highest return on invested capital over time, and that includes vessels between 15 and 20 years. Historically, the average age of assets we've sold is in the very high teens, so it's logical that disposals fall in that range. I would expect further disposal activity in that age range over time.

Yes, that has been the way we've traded the market since the first quarter of last year when we saw the market step change. We think there's value in being open to the spot market with this high volatility. For example, two months ago in mid-June, the spot market for our MRs in the U.S. Gulf was around $20,000, and today it's probably closer to $50,000. Closing down that optionality of capturing these spikes — we benefit as a company from being open to that. From time to time, when we think FFA values are significantly close to where we think the market will be, we utilize that hedging tool. Could we do time charters? Clearly, if some of our top-tier clients requested charters for a longer period, we're willing to do that at a price.

Thank you for that question. S&A and admin cost in general is one of the key KRIs across our integrated platform — every employee has that as a KPI, meaning we're super focused on maintaining administrative cost discipline. The underlying S&A level is very much under control. However, as we published with the Q1 report, the board decided to grant an LTI program for selected employees — a retention program running over three and a half years. When you have a program like that, you provision for it in your accounts, which we've done over the three and a half years. So you will see S&A is higher in the coming period, but it is non-cash — it's a provision for that share-based program, which will expire in 2026. It's a one-off program, so that's about it.

We're very comfortable with our calculations. We have a significant number of vessels over 15 years today, and we have experience operating vessels efficiently past 15 years. It's quite dependent on the general maintenance of the individual vessel, so I don't think you can put a one-size-fits-all number on every vessel. In order to pass what's called the CAP 1 requirements at 15 years old, there's an extra associated CapEx of between half a million to one million dollars. Independent of that, you're extending the useful life towards the same market as vessels below 15 years. So far, we've been very pleased with the results on our integrated platform. I don't think it can be easily replicated, so what I'm explaining may not fit one-to-one with other operational platforms. But all in all, the NPV for us in making this additional investment past 15 years has made sense.