TORM plc (NASDAQ:TRMD) Q1 2019 Earnings Conference Call May 14, 2019 9:00 AM ET
Christian Søgaard-Christensen - Chief Financial Officer
Jacob Meldgaard - Chief Executive Officer and Executive Director
Thank you all for standing by, ladies and gentlemen, and welcome to today’s TORM’s Q1 2019 Report Conference Call.
I would now like to hand the conference over to your speaker, Mr. Jacob Meldgaard. Thank you. Please go ahead.
Thank you for dialing in, and welcome to TORM’s conference call with R&D results for the first quarter of 2019. My name is Christian Søgaard-Christensen, and I’m the CFO of TORM.
As usual, we will refer to the slides as we speak, and at the end of the presentation, we will open up for questions.
With that, turn to Slide 2 please. Before commencing, I would like to draw your attention to our Safe Harbor statement on this slide.
Slide 3 please. So the presenters today is Executive Director, Jacob Meldgaard; and myself Christian Søgaard-Christensen, CFO of TORM.
Slide 4 please. And as we turn to the presentation of the first quarter of 2019, I will hand over to Jacob.
Thank you, Christian, and good afternoon. TORM’s first quarter of 2019 results reflect the strong operating performance the company has had due to an improving product tanker market as well as the benefit we derived from our fully integrated in-house platform. This is shaping up to be an exciting year, and I’ll describe later in the presentation how we look at this.
First, let me summarize our results. In the first quarter of 2019, we realized a positive EBITDA of US$61.5 million and a positive profit before tax of US$23.5 million, or equivalent to US$0.31 per share. TORM’s return on invested capital was positive at 8.8%. The estimated net asset value was US$829 million as of March 31. And later in the presentation, Christian will take us through a breakdown of this metric.
Illustrating our continued focus on maintaining a solid balance sheet, the net loan-to-value was 52% at the end of the quarter and available liquidity was US$438 million. TORM realized an average TCE rate of US$17,949 per day in the first quarter of 2019 at the strong market from the end of 2018 carried over into the New Year. The market has softened a bit since the strong start due to various factors, which I will revert to you shortly, although, rates are still well above last year’s results.
As of May 7 this year, TORM has covered 58% of its second quarter earning days at an average TCE rate of US$16,248 per day. We believe that there are positive dynamics present in the market to support the sustained recovery and I will comment on the market in detail on the following slides.
In the first quarter of 2019, we saw two older MR vessels as part of our continuous fleet renewal activity. We still have seven MR vessels and two LR1s on order. Following the completion of our newbuilding program and assuming no further changes to our fleet, TORM’s fleet will consists of 78 owned vessels and we’ll have a footprint across all key market segments.
As part of TORM preparations for the IMO 2020 regulation, the company has recently decided to install 13 additional scrubbers bringing our total to 34 scrubbers. We expect that 30 of these will be installed in 2019 and the remaining two in the first quarter of 2020. This corresponds to 44% of our fleet.
TORM has committed to a balanced approach towards compliance with IMO 2020 regulations and supporting our preparations, we currently have two scrubbers already in operation. We will gain valuable experience in advance after 2020 deadline. I will further detail – explain the impact from the IMO 2020 regulation throughout our slides.
Slide 5 please. The majority of TORM scrubbers will be produced by ME Production China, the joint venture TORM established last year, along with ME Production, which is a leading scrubber manufacturer and the shipyard GSI.
Our entry into this joint venture was both important strategically as well as timely. Scrubber retrofit capacity has become bottleneck with the yards production capacity tied up across the industry. Also, one of the most significant risks with scrubber installation relates to quality control and the capability of the manufacturers.
Due to our own strategic partnership, we’ve secured required production starts and deliveries on schedule. Delivery and installation schedule we ensure that TORM is ready to reap the benefits of the increased demand of clean petroleum products expected from the implementation of the IMO 2020 regulation.
Slide 6 please. Now I’ll turn to the product tanker market. In the first quarter of 2019, our product tanker fleet realized average TCE earnings of US$17,949 per day. In the LR segment, TORM achieved LR2 rates of US$22,469 per day and LR1 rates of US$18,089 per day. TORM’s largest segment the MRs, TORM achieved rates of US$16,765 per day and TORM’s handy size segment achieved rates of US$18,875 per day.
Product tanker freight rates remained at strong levels in the beginning of 2019, following my reversal that began in the middle of the fourth quarter, reaching levels not seen since the beginning of 2016. Key interregional product arbitrage spreads, which have been closed for most of 2018, widened and lifted demand for product tankers.
Both the price spreads for gasoline and naphtha between West and the East, as well as spreads for diesel and jet fuel between the East and West became supportive for our tanker flows. Product tanker supply feature was similarly positive, as a large number of LR2s shifted from clean to dirty market during the fourth quarter of 2018.
However, we saw strong headwinds from increased market cannibalization from high crude newbuilding deliveries in the beginning of the year. The significance of this factor can be highlighted by the fact that crude newbuildings accounted for 35% of all gasoil trade from the East to the West in Q1, up from around 18% for the full-year of 2018.
As the quarter progressed, spring refinery maintenance commenced in Europe, the U.S. and the Middle East, leading to decreased product exports. Towards the end of the quarter, the transatlantic and transpacific markets were supported by unplanned refinery outages in the U.S. East Coast and U.S. West Coast, which incentivized the gasoline trade to the U.S.
For us, in the second quarter, rates have moderated, although, they remained at healthy levels for this time of the year. While most refiners in the U.S. Gulf and 40% of refiners in Europe have come back for maintenance compared to Q1. Spring refinery maintenance in Asia is at its peak right now, limiting export flows from that region.
Looking ahead, we expect trade flows to increase with seasonal strength and receive an additional boost from preparations to IMO 2020, as bunker suppliers start building inventories of compliant fuels during the second-half of the year.
Slide 7 please. Looking at product inventories, which have been a negative effect on the market for the last two years, the situation is much more sustainable now, as global themed petroleum product inventories are back to five-year average levels. This means that increases in demand are more likely to translate into increases in trade flows and not inventory products.
Looking at individual products, we even see inventories below average levels for diesel in main important regions, which should be supported for trade. On the gasoline side, we see tight gasoline inventories in the U.S. supporting trade flows, although, gasoline inventories in Asia are still relatively high and hence potentially limiting gasoline flows from the West to the East. It will be important to watch these inventories as 2020 approaches, as regulations may impact inventories in certain geographies when, which, of course, in turn can lead to increased trade flows.
Slide 8 please. The structural dislocation between product demand and refinery centers is expected to continue and more refined products will be produced and exported from the Middle-East to the rest of the world.
Over the coming years, the expansion in the region is expected to be significantly higher than in previous three years and more comparable to the level in 2015, at facilities such as the new Saudi Aramco refinery Jazan, and KNPC’s new refinery Al Zour will come online. TORM expects this to reinforce the goal of the Middle East as the key clean product exporter contributing positively product tanker ton-mile demand in the coming years.
Slide 9 please. The shipping industry is preparing for the IMO 2020 regulation and the accompanying shift in marine bunker fuels towards cleaner fuels. One way to compliant with new rules is to use marine gasoil and we expect a large-scale shift from currently used high sulfur fuel towards marine gasoil, which is a type of clean petroleum product that we transport.
For the shipping industries to comply with this regulation, it will be necessary to build and maintain stocks of compliant low sulfur fuels in bunker ports around the world. This may create increased rates for product tankers. Product tankers are also expected to gain from IMO 2020 due to increased refinery runs and the need to store excess high sulfur fuel oil. In preparation for the January 1, 2020 deadline, we expect to start seeing the effects from the second-half of 2019.
TORM currently expects the IMO 2020 software regulation to lead to incremental diesel demand of 1.1 million barrels per day, implying an increase of around 5% in the product tanker trade in 2019, 2020. The increase will depend on the refining industries ability to shift to very low sulfur fuel oil production faster than expected.
I’m convinced that the demand it takes for IMO 2020 software regulation, combined with our strategic steps ahead of implementation date on January 1, 2020, will prove beneficial for TORM over the coming years.
Slide 10 please. To elaborate on the demand effects of IMO 2020, stricter sulfur rules means that the shipping industry would need to use additional marine gasoil, which is a type of fuel that belongs to the family of diesel. While the demand from marine gasoil are more generally diesel will increase in all world regions, flexibility to increase diesel production is much higher in regions that are already net exporters of diesel today.
For examples, a considerable volume of new refined capacity comes online in the Middle East and Asia. Russia is producing more diesel as part of its refining upgrading program and the complex U.S. Gulf refiners, I expected to process more high sulfur fuel that becomes cheaper after 2020 in order to produce extra diesel.
At the same time, the main important regions, the ones that produce too little diesel does not see any new refineries coming online in the next two years. Therefore, their ability to respond to increased demand due to the IMO 2020 is only limited to changes in refinery utilization and product use.
This suggests that on top of the trade flows we are seeing to date even more diesel will be flowing from export regions to import regions due to IMO 2020. The majority of the incremental 5% trade growth from IMO 2020 will stem from long haul trade and intra-Asian medium haul trade. But on top of that, we also expect to see more short haul regional trade for redistribution of compliant bunker fuels. In terms of product tanker trade, IMO 2020 effect would account for around 60% of the total growth in 2020, the rest being, what we will call, organic growth.
Slide 11 please. The product tanker order book to fleet ratio currently stands at 8.3%, which is slow in our historic context. TORM estimates that the product tanker fleet will grow by 4.3% this year, but lower deliveries in the next two years, we will show up in an average fleet growth of around 3.2% per year in the period 2019 through 2021.
This is down to around half from an average – approximately 5.8% during the previous three years. It is also important to mention here that the actual fleet growth in 2019 might come in at a somewhat lower level than the above mentioned 4.3%, as a number of vessels will be removed temporarily from the market in combination with scrubber retrofitting and tank cleaning. This could potentially remove about 0.4% of the fleet capacity. The slowing fleet growth rate is a key point to the fundamental process development we expect for the product tanker industry as a whole.
Slide 12 please. In TORM’s largest segment MR, we have continued to obtain very competitive freight rates, and I’m pleased that our results are at the top of our peer group again this quarter. In fact, when we look back to 2015, we had outperformed the peer group average 16 or 17 times, which translates into additional earnings of more than US$100 million over the period and US$8 million in the first quarter of 2019 alone.
In general, I’m very satisfied that TORM’s operational platform delivers very competitive TCE earnings and that we’re well positioned to take advantage of the promising supply demand fundamentals in the market.
I’ll now hand it over to Christian, for a further review of TORM’s cost structure and financial position.
Thank you, Jacob. Let’s turn to Slide 13 please. With our stock-based profile, TORM has a significant leverage towards increases in underlying product tanker freight rates. As of March 31, 2019 towards the end of first quarter, every $1,000 change increase in the average daily TCE, translate into an increased EBITDA of around $18 million for the year 2019.
The corresponding figures increases to $28 million in 2020 and $29 million in 2021. So TORM has a positive long-term view on the market and we believe that we are well positioned to generate significant cash flows in the period to come.
Slide 14 please. Before taking into our OpEx and admin expense, 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 teams, and we believe that TORM provides a significant competitive advantage from this. Importantly, it also provides a transparent cost structure for our shareholders and eliminate related party transactions.
Naturally, we are focused on maintaining efficient operations and providing a high-quality of service and flexibility to our customers. Despite having this trade-off, we have seen a gradual decrease of 16% in our OpEx figures over the last five years and despite inflationary pressures.
So OpEx was slightly – was around 6,450 barrels per day for the first quarter of 2019, which we find very competitive in light of our fleet composition. We have also remained disciplined with respect to our general and administrative expenses, although, these can be expected to fluctuate a bit based on the size of our fleet.
Slide 15 please. Taking a look at our CapEx and liquidity coming out of the first quarter of 2019, we had available liquidity of US$438 million, cash totaled US$155 million and we have undrawn credit facilities of US$283 million. We then look at our CapEx commitments, they were around US$300 million, of which we expect to pay around US$270 million this year, the remainder will go to in 2020.
The large majority of our commitments relates to our remaining nine high specification newbuilding vessels that all includes scrubber installations, but the figure also include US$40 million in 2019 for retrofitting scrubber installations for our vessels under water. We expect older includes to 13 additional scrubber retrofits that we announced to date. With cash and undrawn credit rights of US$$438 million, the CapEx commitments are fully funded and very manageable.
Slide 16 please. Finally, I would like to sum up our financial position in terms of two key metrics such as net asset value and loan-to-value. Vessel values, as we can see on this slide, have decreased slightly during the first quarter of 2019 and the value of TORM vessels stood at US$1.599 billion at the end of March. Offsetting – offset amounted to US$728 million and none of these debt facilities are maturing in 2019 or 2020.
Finally, we have outstanding committed newbuilding CapEx of US$258 million and cash of US$125 million. This gives TORM a net loan-to-value of 52% at the end of the first quarter, which we consider to be a conservative level and is also decreasing since that we saw coming out of the full-year results. The net asset value is estimated at US$829 million coming out of the first quarter. This corresponds to about $11.2 per share, or DKK74.5 per share.
Before commencing this call, TORM’s shares were trading at DKK55.5, or just about US$8.5 per share. So there’s still a considerable discount to net asset value. In short, we have a balance sheet that provides us with strategic and financial flexibility.
Slide 17 please. With that, I will let the operator open up for questions. Thank you.
[Operator Instructions] We do not have any questions over the phone, sir.
So this will conclude the earnings conference call for the first quarter of 2019. Thank you for dialing in.
Thank you. That concludes our call for today. You may all disconnect, and thank you all for participating.