TORM's (TRMD) CEO Jacob Meldgaard on Q4 2017 Results - Earnings Call Transcript

TORM plc (NASDAQ:TRMD) Q4 2017 Earnings Conference Call March 8, 2018 9:00 AM ET

Executives

Christian Søgaard-Christensen - Chief Financial Officer

Jacob Meldgaard - Chief Executive Officer

Analysts

Dan Togo - Handelsbanken

Operator

Thank you for standing by. And welcome to the TORM’s Annual Report 2017 webcast. At this time, all audio participants are on a listen-only mode. During the presentation, we will have a question-and-answer session [Operator Instructions]. Alternatively, you can submit question at any time via the webcast. I must advise you that this webcast is being recorded today, today, Thursday, the 8th of March, 2018.

I would now like to hand the webcast over to your presenter, Mr. Christian Søgaard-Christ. Please go ahead.

Christian Søgaard-Christensen

Thank you. And thank you for dialing in. And welcome to TORM’s conference call regarding the results for the full year of 2017. My name is Christian Søgaard, and I am the CFO of TORM. As usual, we will refer to the slide as we speak. And at the end of the presentation, we’ll open up for questions.

Next slide please. Before commencing, I would like to draw your attention to our usual Safe Harbor statement on this slide. Next slide please. With me today is Executive Director, Jacob Meldgaard, who will also be presenting. Slide four please. As we turn to the presentation of the full year 2017 results on this slide, I will hand over to Executive Director, Jacob Meldgaard.

Jacob Meldgaard

Thank you, Christian and thank you all for dialing in. Before I turn to our 2017 results, allow me to mention some of our main achievements here in 2017. First, during 2017, we have freed of carried total growth through new financing arrangements. Also in 2017, we have spent equivalent to $1.25 billion on vessel acquisitions. We bought six MR vessels of which two were already delivered in 2017 and the remaining four will be delivered next year in 2019.

In December of ‘17, we listed TORM in New York and declared options for two LR1 newbuildings. And finally, in January of this year, we raised $100 million in new equity earmarked for additional growth on our platform. When I look at our industry in general, I can see that these are indeed outstanding achievements. And we are all proud to inform that we are in a position where we have the platform and the financial strengths to act on the right opportunities.

I will now turn to our 2017 results. I am very satisfied that we were able to remain profitable in 2017 despite what everybody considered a challenging product tanker market. Over the past several quarters, TORM’s commercial performance has consistently been among the best in its peer group in terms of total TCE per day and also return on invested capital.

In 2017, we realized a positive EBITDA of $158 million and a result before tax of $3 million. TORM’s return on invested capital was 2.8% and earnings per share was $0.04. Net loan-to-value was 56% at year end and available liquidity was $405 million. So it’s pretty clear that we have maintained a solid balance sheet even though we completed a number of vessel acquisitions over the course of 2017.

At the beginning of 2017, global clean petroleum product inventory levels were at all time highs. The high inventory levels kept product tanker freight rates under pressure throughout most of the year. And since the start of 2017, we have seen inventory levels come back down to normalized levels.

Across all segments, our average TCE rate was $14,621 per day in 2017. When we look at values and vessel values as assessed by brokers, increased during 2017. And if we take for instance a five-year second half MR as an example, the increase in vessel value is around 10%-11%.

As I mentioned earlier, we brought a total of eight vessels in 2017, two of which have already been delivered into our fleet. And in addition to the vessels brought, we did sale five older vessels during the year. If we look here into 2018 as of the 2nd March, we have fixed 27% of our total earnings days for 2018 at an average TCE of $15,792 to-date.

Next slide please. Now, I will turn to the product tanker market. As mentioned, our product tanker fleet realized average TCU earnings of $14,621 a day over the year. At the beginning of 2017, global clean petroleum products inventory levels were at all-time high. This in turn dampened demand for transportation and kept product tanker freight rates under pressure throughout most of the year. The decrease in clean petroleum product inventories in 2017 alone corresponds to a loss of a potential freight of 4% based on the volumes alone.

Despite this negative impact from coming down from high inventory levels, we have seen regional freight rate spikes over the course of 2017. One of the highlights of the 2017 product tanker market was that we experienced strong trans-Pacific market at the end of third quarter and into the fourth quarter. To me, this suggests that our product tanker market is balanced and that the market reacts as expected when local inventory levels are low.

In the LR segment, TORM achieved LR2 rates of $16,304 per day and for the LR1s the rates were $30,771 per day. In our largest segment, the MRs, here the achieved rate was $14,850 average per day for the year. And finally in the [indiscernible] [Handy Charter] segment here our realized rates were $12,239 per day.

So let's turn to the next slide. As already mentioned, recent data suggests that inventory levels on a global scale are now back at normalized levels. And here if you please take a look at the graph on the top left, you'll see that the red line representing 2017 was below the five-year average towards the end of the year. This element provides a good foundation for the product tanker freight rates going forward.

If we turn our attention to the long-term demand factors, the relocation of refinery capacity from the traditional consuming areas to, for instance, the Middle East is indeed very positive for ton mile. Refinery additions in the Middle East have contributed significantly to the product tanker market over the past six years. And the good news here is that we have even more refinery additions in the pipeline for the coming six years, as shown in the graph on the left hand side. When we look at product tanker demand, we see that overall the fundamental demand factors driving the product tanker market in the long-term perspective remain intact and we are forecasting ton mile demand to grow by around 5% annually, up until and including 2020. This bodes well for the future.

Next slide please. The supply outlook for product tankers remained intact. Throughout 2017, we have seen limited ordering activity and the order book to fleet ratios remain at a historically low level around 10% for MR vessels. By our projections, this ratio will go down to around 7% by the end of 2019. So far in this year, we have had a relatively high number of deliveries. But as we look ahead throughout 2018, there are fewer scheduled deliveries and we are thus expecting supply growth to be at a level around 4% for 2018 followed by a slow down into 2019 and 2020.

Next slide please. TORM has 78 owned and chartered on the order product tanker vessels. In total, that gives us approximately 30,000 earnings days on an annual basis. Our spot profile will enable us to fully capture the benefits in a fundamentally strong product tanker market. And as you can see here from the graph, at the end of 2017, we had approximately 24,106 earned days remaining for 2018, giving a sensitivity of approximately $24 million for each $1,000 per day change in our realized rates.

As of last Friday, we had approximately 20,300 on fixed earning days remaining for the year, giving a sensitivity of just above $20 million. And so far this year, we have covered now 27% of the earning days for the year at a level around $15,800 per day.

Next slide please. In TORM’s largest segment, MR, we obtained very competitive freight rates throughout the year. And I am pleased that our results are again at the top of our peer group this quarter. In fact, when we look back over the past 10 quarters, we have outperformed the peer group average nine out of 10 times, which translates into additional earnings of $55 million over the period and $34 million in 2017 alone.

In general, it’s fair to say that our operational performance delivered very competitive TCE earnings and we are therefore well positioned to take advantage of the problems in supply and demand fundamentals for the market.

I will now hand over to CFO, Christian Søgaard-Christensen for a further review of our cost structure and financial position.

Christian Søgaard-Christensen

Thank you. Slide 10 please. Over the last three years or so, the fleet operating cost per day has been trending down despite inflationary pressure. In 2017, we have average OpEx a day of around $6,600 to $6700, the lowest level since 2012 and 13% lower compared to 2014. We expect to remain at this level in 2018 although some fluctuation across the quarters I expect to occur.

It is an important part of our strategy that we maintain competitive cost level and at the same time into a high quality of the vessels. Therefore, I'm particularly pleased that our main KPI on quality, tradability is at a record high in 2017. This ultimately gives us the best foundation for our strong commercial performance.

Slide 11 please. As you know, we keep several function in-house where other players are outsourcing them; this includes full commercial management, full technical management, as well as sell and purchase activities. Our integrated business model also provides the transparent cost pressure with basically all cost being integrated and no transaction with affiliated companies or similar leakages. After having almost half to admin cost since 2008, we are now at a competitive level around $1,650 per earning day.

For 2018, we expect admin expenses to remain at a similar level. Although, we have owned new offices and invested in digitalization and business intelligence efforts. Our track record on OpEx and admin cost underpins our ability and our scale.

Slide 12 please. As of 31st of December, 2017, we had available liquidity of $405 million cash totaled $134 million and we have undrawn credit facilities of $271 million. In January of ’18, we raised new equity of $100 million, which takes our available liquidity north of $0.5 billion. By the end of the year, our total CapEx commitments to newbuildings were $370 million. Of which, we expect to pay $143 million during this year. The remainder will fall due in 2019.

With cash and undrawn drawing was about $0.5 billion, the CapEx commitments are fully funded and very manageable. The outstanding prospect amounted to $749 million at year-end. TORM's lending facilities have attractive prepayment profiles with 65% of the scheduled installments falling due after 2020. Net loan to value was 56% at year-end, which we consider a good conservative level where we are in the business cycle. However, if you take in the capital raise, in general, our net LTV is now below 50%.

So to recap, I am very satisfied with having a solid balance sheet, which gives us ample strategic and financial flexibility in this market. Slide 13 please. So with that, I will let the operator open up for questions.

Question-and-Answer Session

Operator

Thank you very much [Operator Instructions]. And the first question from the phone line comes from the line of Dan Togo from Handelsbanken. Please ask your question.

Dan Togo

A few questions from my end. Just to understand the development and fleet values between -- in Q3 and in Q4. What lies behind the assumption and valuation of the value of a standard MR five year in Q3 to Q4 the value -- the asset value and peak value that you have there? That’s the first question.

Jacob Meldgaard

So in general, what we do on all of our fleet is that it is on a quarterly basis evaluated by two brokerage firms, who independently value it and we use the average of the two companies as the base part. And what has happened between end Q3 and end Q4 in general is that there has been, as we point to a general upfront, which equates to about 4% if you blend our fleet. And it’s approximately the same for the MR.

Dan Togo

And then on the CapEx side, I understand you have around 150 to come in two years here. What if we then look into 2020, what will come down to by then, what is -- just to understand, what is an underlying maintenance level that we could count on in the longer run for CapEx?

Christian Søgaard-Christensen

So I guess your question is coming, so besides the ordinary dry-docking cost and then looking at if anything we need to factor in there. And I think it is a bit early to evaluate what exactly is going to be the right strategy for dealing with 2020 sulfur requirements. But if you look at our ordinary CapEx for dry docking, it will be similar to what you’ll see in the last couple of years.

Dan Togo

And then you already mentioned that cushion around sulfur, because one is just stratifying right now you brought on the analysis et cetera. Are you looking at eco-friendly designs as prepared designs in order to accommodate 2020?

Jacob Meldgaard

So as you point to there’s a couple of ways which basically if you have vessels that are being ordered to prepare yourself. One, you could obviously do nothing and see what happens then. Two, you could design the asset to be scoped and ready or you could go way the full way and say well let’s make this and let’s install this level. And so far we have decided on four of the newbuilds that we have delivering this year and next year that they will be in rich products and for the rest of the vessels so far we have made them to go already.

Dan Togo

And how bigger investment is it to upgrade, so to say?

Jacob Meldgaard

So it depends on the vessel size. I think rule of thumb will be that for an MR class vessel, I would estimate somewhere between $1.5 million to $2 million for larger vessels LR1, LR2 which probably to the tune of $2.5 million approx. A couple of different types of you can have them open loop, if you will. So it depends a bit on the design that you chose.

Dan Togo

And that is tube with the vessels per pass so it’s ready for scrubbers?

Jacob Meldgaard

Yes.

Dan Togo

And then just a final question on the market side. You mentioned inventories have come down and fleet’s growth is also coming down, which is all very nice so to say. But what about other market drivers like the LPG ratio and refining margins. Are they so to say close at hands to come into play and expecting the demand side of equation?

Jacob Meldgaard

So if you find to the spread between that in the plastics industry, in general, you can use it like LPT on asset as the input. Then currently LPT is the more favorable part because the price of LPT has directionally been falling more than that. And so at input into that subsector, there’s not been any tailwind so to say from that currently. Number two, on refinery markets, well they've also been coming down. But I am not sure that there is a strong correlation between underlying demand from consumers and therefore also demand for transportation and then the refinery margins. So refinery margins, they will be volatile and fluctuating. However, the underlying demand is probably what we are following more and as we point to also the stock built.

Operator

The next question from the phone line is from the line of Marcus [indiscernible]. Please ask your question.

Unidentified Analyst

Just a follow up question on the scrubber side. Talked to one of your competitors who suggested that didn't quite make sense to install scrubbers on smaller vessels such as MRs. Maybe you just elaborate a little bit about scrubber economics as you see it. What spread between MGO and HFO does it require? What are the payback times we're looking at, et cetera?

Jacob Meldgaard

So I think in general what we would like to see if you have decisions for years that the payback time should be no more than five. I think for this type of investment that makes sense for us to evaluate whether it fits to build on that. And then you would want to see that even in a scenario where you move away from taking the average spread let's say over the past whatever two years, three years, five years that you would still want to stress test that to some degree.

And so even though I think in general that the section and the forward curve illustrate that you'll have a wider spread, let's stress this investment by also narrowing the freight rather than widening it compared to the historic data. If it then fits the build with the CapEx and time out of service in case of a existing vessel, you would obviously have time out of service and dry bulk et cetera in case of a vessel that is being built, that’s not the case that you would have no time loss and you would basically also have only more or less installation cost and equipment cost to use. So obviously, the payback time irrespective of what spec you have will be longer for an existing vessel than for one where you fill it at the yard. So that’s our thinking.

Unidentified Analyst

And then may be a second question if I may. I am just curious your U.S. listing, what’s the progress there, how many -- do you know how many shareholders have decided to move their shares from Demark to the U.S., for example?

Christian Søgaard-Christensen

So I think if you look at it -- it’s actually spanning out as we expected is that there will be an illiquidity in the beginning but we are starting to see overall liquidity moving up. And if you look at it also the liquidity following our capital raise, it’s also been better. So I do think that the U.S. listing is a question of picking up pace during the course of 2018 just as we planned.

Operator

Thank you. The next question from the phone line is from the line of [indiscernible] from Jyske Bank. Please ask your question.

Unidentified Analyst

I understand that the oversupply of crude tankers is having a spillover you take into the product market. Could you just describe how that works? And is there any way that we can predict or see how that might change over the next several quarters?

Jacob Meldgaard

Yes. So as you pointed, it’s correct observation that crude tankers that come out of the yard have the ability to carry clean petroleum products at the first voyage. They’re obviously at that point not contaminated by having carried crude and the tanks are fully capable of then lifting, larger products or clean petroleum products. How you can follow the development on that is obviously what is the expected number of newbuilds that come out quarter-by-quarter, the particular type of vessel that makes sense to do this and it’s predominantly on the Suezmax, which is slightly -- is about 50% larger than an LR2.

So it’s so much from a commercial and logistical point of view makes sense for trailers to operate the Suezmax on the first voyage. So a good way to gauge this is to simply follow the number of expected deliveries as we progress. Currently, there’s still a relatively high number of expected deliveries in this segment.

Unidentified Analyst

And for the next how many quarters does that go on?

Jacob Meldgaard

So as I see it, this is something that we could expect for the remainder of 2018.

Unidentified Analyst

Second question on the rate, I noticed that you have -- I think you had 12% coverage for '18 at $18,000 per day. Now you have 27% coverage at $15,800. What are the -- that suggests that you are fixing at an average rate of $13,000 and if that continues for the rest of the year, your average rate for the year might be, I don't know, roughly $14,000 or so. Is that the right way to look at it?

Jacob Meldgaard

So actually the data that we have and that we also provided to the market is that our spot earning is just around 14. And then it's blended as you point to with the coverage that we already have from back in 2015. The markets as we see it right now is around this, let's say $14,000 and of course with volatility week-by-week. But that's what we've experienced to-date.

Christian Søgaard-Christensen

And $14,000 is also correlating to our net income breakeven.

Operator

Thank you. At this time, we have no further questions from the phone lines or from the Web platform. Please continue.

Jacob Meldgaard

Thank you. So this concludes the earnings conference call for the full year of 2017. We will release our Q1 report on 17th of May. Thank you for dialing in.