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Q1 2019 Earnings Call
May 14, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you all for standing by, ladies and gentlemen, and welcome to today's TORM Q1 2019 report conference call. I would now like to hand the conference over to your speaker Mr. Jacob Maldgaard. Thank you. Please go ahead.

Christian Søgaard-Christensen -- Chief Financial Officer

Thank you for dialing in and welcome to TORM's conference call regarding the 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'll open 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.

The presenter today is Executive Director Jacob Meldgaard and myself, Christian Søgaard-Christensen CFO of TORM. Slide 4, please. As we turn to the presentation of the first quarter of 2019, I will hand over to Jacob.

Jacob Meldgaard -- Chief Executive Officer

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 and market as well as the benefits we derive 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 $61.5 million and a positive profit before tax of $23.5 million or equivalent to $0.31 per share. TORM's return on investment capital was positive at 8.8%.

The estimated net asset value was $829 million as of 31st March and later in the presentation question, we'll take you through a breakdown of this metric. Illustrating our continued progress on maintaining a solid balance sheet, the net loan to value was 52% at the end of the quarter and available liquidity was $438 million. TORM realized an average TCE rate of $17,949 per day in the first quarter of 2019 as 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'll refer to shortly, although rates are still well above last year's levels. As of 7th of May this year, TORM has covered 58% of its second-quarter earnings base at an average TCE rate of $16,248 per day. We believe that there are positive demands present in the market to support a sustained recovery and I will comment on the market in detail on the following slides.

In the first quarter of 2019, we sold two older MR vessels as part of our continuous fleet renewal activities. We still have 7 MR vessels and two other ones on order. Following the completion of our new billing program and assuming no further changes to our fleet, TORM's fleet will consist of 78 owned vessels and we'll have a footprint across all key market segments.

As part of TORM's 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 2 in the first quarter of 2020. This corresponds to 44% of our fleet. TORM is committed to a balanced approach toward compliance with IMO 2020 regulations and supporting the preparations we currently have two scrubbers already in operation. We will gain valuable experience in advance of the 2020 deadline. I'll in 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 a bottleneck with yard's 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 strategic partnership, we have secured the required production slots and deliveries are on schedule. Delivery and installation schedule will ensure that TORM is ready to reap the benefits of the increased demand of these important products expected from the implementation of the IMO 2020 regulation.

Slide 6, please. Now I will turn to the product tanker market. In the first quarter of 2019, our product tanker fleet realized average TCE earnings of $17,949 per day. In the LR segment, TORM achieved LR2 rates of $22,469 per day and LR1 rates of $18,089 per day. For TORM's largest segments the MRs, TORM achieved rates of $16,765 per day and TORM's handy size segment achieved rates of $18,875 per day.

Product tanker freight rates remained at strong levels at the beginning of 2019 following a mild reversal that began in the middle of the fourth quarter reaching levels not seen since the beginning of 2016. Key inter-regional products arbitrage spread, which had been closed for most of 2018, widened and lifted the demand for product tankers. Both the price spread for gasoline and naphtha between West and the East as well as spreads for diesel and jet fuel between the East and the West became supportive of product 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 new billing deliveries at the beginning of the year. The significance of this factor can be highlighted by the fact that crude new billings accounted for 35% of all gas oil 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 US, 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 US East Coast and US West Coast which incentivized the gasoline trade to the US. Plus, in the second quarter rates had moderated although they remained at healthy levels for this time of the year. Most refineries in the US Gulf and 40% refineries in Europe have come back from maintenance compared to Q1 rates. 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 trends and receive an additional boost from preparations to IMO 2020 as prominent 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 importing regions which should be supported for trade. On the gasoline side, we see tight gasoline inventories in the US supporting trade flows although gasoline inventories in Asia are still at 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. Then which, of course, in turn, can lead to increased trade flows.

Slide 8 please. The structure dislocation between product demand and refinery centers is expected to continue. 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 the previous three years and more comparable to the level in 2015 as facilities assess the new Saudi ran refinery Jazan and KPC'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 in TORM's amount to mild 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 toward cleaner fuels. One way to comply with these new rules is to use marine gas oil and we expect a large-scale shift from currently used high sulfur fuel toward marine gas oil 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 struts of compliant low sulfur fuels in bunker ports around the world. This may create increased rates for product tankers.

Fuel 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 of the 1st January 2020 deadline, we expect to start seeing the effects from the second half of 2019.

TORM currently expects the IMO 2020 sulfur regulation to lead to incremental diesel demand of 1.1 million barrels per day implying an increase was around 5% in the product tanker trade in '19 and 2020. The increase will depend on the refining industries ability to shift to very low sulfur fuel production faster than expected. I'm convinced that the demand it takes of the IMO 2020 sulfur regulation combined with our strategic steps ahead of the implementation date of 1st January 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 gas oil which is a type of fuel which belongs to the family of diesel. While the demand for marine gas oil or more general diesel will increase in all world regions, this ability to increase diesel production is much higher in regions that are already net exporters of diesel today. For examples, a considerable volume of new refinery capacity comes online in the Middle East and Asia. Russia is producing more diesel as part of its refining upgrading program and the complex US Gulf refiners are expected to process more high sulfur fuel oil. That becomes cheaper after 2020 in order to produce extra diesel.

At the same time, the main importing 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're seeing today, even more, diesel will be flowing from export regions to import regions due to IMO 2020. The majority of the incremental 5% in trade growth from IMO 2020 will stem from long haul trade and intra-Asian median holds rates. On top 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 50% of the total growth in 2020, the rest being what we would call organize growth.

Slide 11, please. The product tanker order book to fleet ratio currently stands at 8.3% which is low in a historical context. TORM estimates that the product tanker fleet will grow by 4.3% this year but lower than average in the next two years. We will show up in an average fleet growth of around 3.2% per year in the period 2019-2021. This is down to around half from an average of approximately 5.8% during the previous three years. It is also important to mention here that the actual sequel in 2019 might come in at a somewhat low level than the abovementioned 4.3% as a number of vessels will be removed temporarily from the market in combination with scrubber retrofitting and tanking. This could potentially remove about 0.4% of the fleet capacity. The slowing fleet growth rate is a key point through the fundamental process, and 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 have outperformed the peer group average 16 or 17 times. Which translates into additional earnings of more the $100 million over the period and $8 million in the first quarter of 2019 alone.

In general, I am very satisfied that TORM's operational platform delivers very competitive TCE earnings and that we are well-positioned to take advantage of the promising supply and demand in the market.

I'll now hand it over to Christian for a further review of TORM's cost structure and financial precision.

Christian Søgaard-Christensen -- Chief Financial Officer

Thank you, Jacob. Let's turn to slide 13, please. With our spot-based profile, TORM has significant leverage to increase us in the underlying product tanker freight rates. As of 31st of March 2019, so the end of the first quarter, every $1000 change or increase in the average daily TCE translated to an increased EBITDA of around $18 million throughout the year of 2019. The corresponding figures increase 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 digging into our OpEx and admin expenses, 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 internal segment purchasing. We believe that TORM provides a significant competitive advantage from this. Importantly, it also provides a transparent cost structure for our shareholders and eliminates 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're seeing a gradual decrease of 16% in our OpEx per day over the last five years. That is despite inflationary pressures. OpEx was around $6,450 per day for the first quarter of 2019 which we find very competitive in light of our fee composition. We have also remained disciplined with respect to our general and administrative expenses, although these could 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 $438 million. Cast total of $155 million. And we had unformed credit resources of $283 million. We then look at our capex contributors, they were around $300 million of which we expect to pay around $270 million this year. The remainder will fall due in 2020. The large majority of our commitments relates to our remaining 9 high specification new building vessels that all include scrubber installations. The figure also includes $40 million in 2019 for retrofitting scrubber installations for our business under water. This figure also includes the additional scrubber retrofits that we announced today.

With cash and underlying credit rights, rights of $438 million, the capex commitment are fully funded and very manageable. Slide 16, please. Finally, I would like to sum up our finances in terms of two key metrics such as net asset value and loan to value. Vessel values, as you can see on this slide, have decreased slightly during the first quarter of 2019 and the value of TORM vessels stood at $1.599 billion at the end of March. Outstanding debt amounted to $728 million and none of these facilities are maturing in 2019 or 2020.

Finally, we have outstanding committed new billing capex of $258 million and cash of $155 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 what we saw coming out of the full year results. The net asset value is estimated at $829 million coming out of the first quarter. This corresponds to about $11.2 per share or 74.5 Danish krone per share.

Before commencing this call, TORM's shares were trading at 55.5 Danish krone or just about $8.50 per share. There is still a considerable discount from 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.

Questions and Answers:


For the participants over the phone, if you have any questions you may press * and 1 on your telephone keypad and then wait for your name to be announced. Alternately, on the participants over the web, if you have any questions you may type in your questions on the Q&A tablet on your screen.

We do not have any questions over the phone, Sir.

Christian Søgaard-Christensen -- Chief Financial Officer

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.

Duration: 25 minutes

Call participants:

Christian Søgaard-Christensen -- Chief Financial Officer

Jacob Meldgaard -- Chief Executive Officer

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