Ladies and gentlemen, thank you for standing by, and welcome to the TORM’s Q1 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 14th of May 2020. I’d now like to hand the conference over to first speaker today, Mr. Morten Agdrup. Thank you. Please go ahead.

Thank you, and thank you for dialing in, and welcome to TORM’s conference call regarding the results for the first quarter of 2020. My name is Morten Agdrup, and I’m Head of Corporate Finance and Strategy in 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. Slide 2. Before commencing, I would like to draw your attention to our Safe Harbor statement. Slide 3, please. With me today, I have Executive Director, Jacob Meldgaard; and our Chief Financial Officer, Kim Balle. I’ll now hand the call over to Jacob.

Okay. Slide 4, please, and thank you, Morten, good afternoon all. Before we turn to the financial results and also the market, I’d like to take a short moment here to focus on safety. And safety is obviously top priority for TORM. It has had an even greater focus here during the COVID-19 pandemic. So as an integrated part of our culture, it has been relatively natural and easy for us to execute the precautionary measures such as work from home policies at early stages during this pandemic. I’m really pleased to note that our One TORM platform has secured the safe operations of our vessels without any major operational issues in this period. Please turn to Slide 5. So not an owner have we navigated successfully on safety, we also navigated the volatile product tanker market here in the first quarter of 2020, that was especially impacted by COVID-19 and also the OPEC decisions. Our results for the quarter were enhanced by the strong operational focus and our focus on maintaining efficient operations, despite the challenges that has stemmed from COVID-19. The product tanker market has experienced a strongest start to the year in more than a decade, and it’s retaining the strength experienced that we – in the last quarter of 2019. So, here, in the first quarter of 2020, it has also been very volatile, influenced not only by the COVID-19 situation, the OPEC+ events and the related oil price development, but also by difficult inefficiencies and refinery maintenance. So for here in the second quarter, the market strengthened further. It was supported by increased interest for the floating storage both on crude and on products, due to the contango in the oil price. We’ll go into the details on the market shortly. Zooming in on the…

Thank you, Jacob. Please turn to Slide 17. With our spot-based profile, TORM has significant leverage to increase in the underlying product tanker rates. As of 31st of March 2020, every $1,000 increase in the average daily TCE rate achieved translate into an increase in EBITDA of around $19 million in 2020. The corresponding figure increase to $28 million in 2021 and 2022. As of 11th May, 2020, the coverage for the second quarter of 2020 was 69% at $29,188 per day. For the individual segments, the coverage ranges from around $19,000 per day for the smaller Handysize vessels and up to around $36,000 per day for the larger LR vessels. Slide 18, please. As Jacob mentioned, TORM achieved the profit before tax of $57 million in the first quarter of 2020. This is higher than the adjusted full-year result in 2019 of $47 million. The result corresponds to a quarterly – to quarterly earnings per share of $0.76, which on an annualized basis, is $3 per share, or around $20 – DKK 20. Similar, if the first quarter result would continue throughout 2020, the profit before tax for 2020 would be above $200 million. We do obviously not know the exact development of the market at our earnings over the coming quarters. But for Q2, coverage until 11th May 2020, it provide us with a buffer to that number so far of approximately $25 million. As illustrated, TORM’s financial results is very sensitive to changes in freight rates. Slide 19, please. Before discussing our cost structure, 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 sales and purchase team, which we believe is a significant competitive advantage for TORM. Importantly, it…

Thank you, ladies and gentlemen. [Operator Instructions] Thank you. Your first question comes from the line of Jon Chappell from Evercore. Please ask your question.

Thank you. Good afternoon, everybody. Hope you’re doing well.

Good morning, Jon. Hope you’re safe.

Thank you. Jacob, first question is on duration of contract coverage. So the 89% for the second quarter, obviously, makes sense given we’re in mid-May. But if you look to 2021 in your presentation, it’s only 2% of the LR2s and then 0% across the rest of the fleet. So what’s your desire to lock-in more than anything sort of the elevated structure today, and sort of curious about the medium-term with the inventory destocking? And is that a strategic decision by TORM to not take any of those beyond six months? Or is it just a function of, there’s no liquidity in the markets today?

Yes, absolutely. Good question, Jon, as usual. So I think it’s fair to say that the liquidity as we see it in the longer-term deals have really been subdued. I think, as I see the economic uncertainty, which is hitting all of us due to COVID-19, it has also hit, in my opinion, the shipping markets in respect of that, that most access in these markets have been really reluctant to go long on the curve even at discounted rates to the current elevated. So we’ve seen very few transactions that have been meaningful for longer-term cover. But we would, obviously, also engage in that type of dialogue with the right partners. I think one of the things that we also, of course, have to evaluate is that the risk on counterparty, we have not had any issues, but we do need to evaluate in the current environment, where are you really in the value chain compared to operating ships? And so I think that the liquidity is down and also our awareness around counterparty risk longer on the curve is, of course, increased in this situation.

Okay. That makes sense. And then turning a couple of things together, when we think about capital allocation given the uncertainty that you just mentioned, given Kim’s presentation about no debt maturities well into the – into this decade, you only have two more ships to take delivery of in the three more with scrubbers. But given, like I said before, the uncertainty, how do you think about your dividend policy? Do you still maintain the 25% to 50%, and then use the excess cash from the mountain that you’re probably building in the first-half of this year to liquid assets? Or do you maybe scale it back or go to the lower-end, because you’re not sure how the market plays out over the next 12 months to 18 months?

It’s a very relevant question. But you’re three months ahead of the curve, to be honest, Jon. So we will be evaluating that together with the Board at our meeting in August, once we have the full first-half result. And currently, I think, it’s simply too early for us to speculate around how the world will look in August. So I simply reserve that. We will do what is right. Obviously, currently…

Okay.

…our distribution policy is very clear, 25% to 50% of the net profit. Obviously, would we be in a world that is dramatically different than the one we anticipate? We need to evaluate that. But I think it’s too early.

Well, then I’ll ask it again in August. And then the meantime, let me just – let me ask you, you’re generating so much cash in the first-half of the year. So dividend or even buybacks aside, do you look to rapidly delever the balance sheet in this type of environment? Or do you still think that asset values don’t appropriately reflect the positive, medium and long-term supply demand outlook laid out in the presentation?

I think the same goes to this. I think we need to get a little more clarity and transparency around both the market development and also where asset prices are really clearing to give you the exact answer to that. So I think we are really flexible around this. Personally, I would like to see some of these events that has been unfolding, which relates, of course, to the buildup of floating storage, the dent in demand and the slide that we discussed around economic recovery and therefore, also recovering demand. How is that actually going to play out? What are the positive factors and what are the negatives? I’ve just seen a number of reports discussing, for instance, the gasoline consumption in the U.S. rebounding from the bottoms – from the lowest in April already now before you have a real reopening of the economy. And everything else being equal, out of all global consumption of clean petroleum products, 10% is gasoline in the U.S. So that is a key fundamental driver to also understand what will happen, let’s say, over the coming months. You will have an unwinding, everything else being equal of the operational inefficiencies, hopefully, with global economy coming back. And you could say that, that would lead to a subdued rate environment. However, there are also indicators of that some of the consumer behavior will actually be to the benefit of us around separating yourself from other people in the society more than what we’ve been used to, i.e., take your own car, if that is a viable option for you.

All right. Thank you for your [Multiple Speakers]

I think we need to have more clarity, Jon, to be honest, before we make these calls, and I think we’re a bit early to do that.

Yes, completely [Multiple Speakers]

But it would be very interesting to [Multiple Speakers]

Yes, correct. Thank you.

Thanks, Jon.

Thank you. Your next question comes from the line of Anders Wennberg. Please ask your question.

Hello, Anders Wennberg here from Catella. I just wonder a little bit about this level of fixings for Q2. Seems fairly low compared to the extremely high growth rates we’ve seen in the market. I realize there is a delay effect, and also the – it could be an effect of demurrage of the ships may be signed up in March, have them uploaded yet, and are running on the old deals made up in March at lower levels. Can you elaborate a little bit on the delay versus the spot market and what you are realizing, so we better understand how this is being captured on this kind of timeline? Thanks.

I think you were pointing exactly to it that, there’s two elements to – we’ve – I have to say, we’re really very excited about the rates that we have on average. Because as you can imagine, Q2 starts in March for us, but that’s when you start booking the rates. So you will have March bookings that will be realized in April and May. That’s number one, exactly the way you describe it. And then there is also the fact that given that about 20% of our fleet is currently in, what we would call, operational storage. All of those vessels are engaged in earning, as you described, a lower than the spot market, because they are entering into the demurrage rate. So those two components together, blended within bookings in the current rate environment gives executives sort of the blended rate that we have here. And I’m truly excited about that level to be honest, I can understand that if you apply a snapshot of a spot market, let’s say, of X, and you say that is what is attributable to the full fleet for the full quarter, then you will be – then it will be a lower number that we realized. But that is a fact these are the numbers and I think we are doing well. And I compare to peers in our largest segment, I’ve not seen anybody realized higher numbers.

So to turn the argument around, if spot market would come down in the third quarter and the fourth quarter, there’s probably going to be a similar delay going the other direction. Some ships not being able to offload the cargo and running on old rates tied up in April, May, at very, very high level, way above both levels, is that kind of a fair assumption that we can get catch up from this in Q3 and Q4?

I think it’s a bit early to say that. You could say the economic incentive for the people who would have had your vessel on at low rates to still utilize you sort of as a floating storage is obviously higher. And somebody who has contracted you at a high rate in a low-freight environment, because there they’ll have an uncertainty to substitute you for alternative floating storage capacity. So I’m not sure it works the way you describe it, I can hope. But I’m not sure that would be the dynamic, because there’s fundamentally a different incentive for the charterer to actually offload your vessel and take another vessel as an alternative in this scenario you’re describing, whereas that is obviously not the case if the alternative rate is higher.

Okay. The cargo owners have a bit of optionality basically?

You can say that, because they can make a ship-to-ship transfer of the cargo that you have right now sitting, let’s say, that you contracted a rate X already in March and that rate X is lower than the current market, you would try to hold on to that. It’s the other way around that you contracted in, let’s say, in May at a very high number and you’re sitting – waiting, you would have an incentive if the market falls down to actually do a ship-to-ship transfer, rent another vessel from another ship owner at a lower rate and take the saving.

Okay, thanks.

All right. Thank you. The next question comes from the line of Ulrik Bak from SEB. Please ask your question.

Yes, good afternoon. Also a couple of questions from my side. So you state that your fixed 69% of your Q2 vessel days at just above $29,000 per day. So based on the current spot rates, do you expect this average rate to increase or decrease as we approach the end of Q2? And also if you can talk about what the spot rates you are fixing to right now for each segment, that would be appreciated?

Yes. So if we take the bookings that we sort of entered into last week, so that will be the latest data points that I have. I can give you the exact sort of level that we have there. Just one second, let me take it up here on my computer. So we booked MRs on average around 40,000 last week.

Okay. And for LR2, LR1?

We didn’t have any bookings.

Okay. Okay, but obviously, high level…

I think what we are experiencing, if you also see is that, we have a falling tendency in the freight rate environment currently at very low liquidity. So I estimate that the current market on MRs sort of at a global level is probably sub-30 now.

Okay.

Let’s say, high 20…

Okay.

…would be the current market today.

Okay. And then a follow-up question. So there’s a lot of talk about the oil market dynamics and you alluded to it in your presentation as well with the supply and demand being out of sync. And while some sources indicate that supply and demand balance will be reached in August, September, others indicated that it will be reached as early as June. So what are your expectations? And what you see as a floor for the MR rates once inventories begin to unwind, given the – yes, the tanker dynamics?

I simply think it’s too early to come up with precise data points on that. If I consider how many events that have been taking place over the last two months and take that out on up until, let’s say, the rest of this year, we will have a lot of volatility. And I expect more volatility due to oil price still potentially being, I would say, up against an environment that is unknown, uncharted for oil traders, where oil price on a day-to-day basis can move in and out of contango easily. I also expect that the closure and then reopening of economies will not be just a stable ride. We’ve seen this tendency, especially in Southeast Asia, if you look at South Korea, if you look at Singapore, as examples of economies where you step up and you step out of the lockdown and into something more normal, but where you have to reset and go back into lockdown. So I think to – now expect that this will be just a smooth ride with rates going in one particular direction, it’s not the way I look upon this. I think it’s too early for that type of environment and we’re not planning in accordance to that. We are planning much more to that it is a very unknown environment over the coming months and we’re ready for that.

Okay, got it. And then also a question to this delay effect that was asked about previously. And so what are the average journeys for each segment? Just to get an idea, so how long is this time lag between for voyage, so for the LR2s, I suppose voyages are longer than the MR. So – and also in the current environment, where you say there are a lot of inefficiencies going on, ships sailing other routes than usual. So perhaps as these voyages have they increased significantly compared to what they usually are?

Yes. So every voyage – every cargo that you have currently on average is longer, whether it’s in the larger segment where you have longer trade routes, let’s say, on LR2s, where you have generally voyages 40, 50 days or whether it is in MRs where generally you have shorter, let’s say, 25 to 30 days. Then, in both cases, the average duration of a voyage is longer to carry the same amount of cargo, because either of the destination being further away, as I described also, or in the case where you have operational inefficiencies and you arrive at the just [ph] port and you simply sit and wait for the terminal and the infrastructure to be ready. So, yes, in general terms, on average, every cargo movement is longer and that is, of course, c on top of the other inefficiency.

Okay. Thank you. No further questions from my side. Thank you.

Thank you. The next question comes from the line of Anders Karlsen from Danske Bank. Please ask your question.

Yes. God afternoon. I was wondering a little bit about the logistical issues that you’re facing. Can you say anything about – is that increasing now that you see that the line up in ports is actually growing? Or are you seeing signs that it’s easing off? A little bit follow-up to that. What kind of demurrage rates are you seeing in the various segments these days? I guess, that’s – that’ll be a reflection of waiting time going forward?

Thank you, Anders. I think it is eased a little of as of late, but not something dramatic. As you can also see from the figures that we have 14%. That is relatively high figure, as we mentioned, four times what we would expect as a normal trend. Obviously, some vessels they opt out of this lineup and others come in. But in aggregate, it’s about 14%. I think this is around the level that we currently expect sort of the system to have. And that from there, you would expect that at a certain time when economies, they come back that it will ease off from this level. It’s probably been the highest that we have observed was 15%. The demurrage rates are in line with the market. So over the last couple of weeks, you would have – if you book a cargo, where the TCE equivalent, let’s say, is $50,000, as an example, then you would have to demurrage rates that are very much in line with that. So they basically – they are a bit lower when the market is high. And when the market is lower, let’s say, that the market was $15,000, then you would probably achieve a demurrage rate that was slightly higher. So that’s the dynamic in that. But demurrage rate tends to follow closely with the development in the freight rates, and with freight rates are very high, demurrage rates are slightly lower. When freight rates are in the lower rates, demurrage rates are slightly higher.

Okay. Thank you. Are you seeing any particular regions where delays are higher than others? And are there regions where there is absolutely full stop and others, where you have some kind of the movement in the line-ups and others, where there isn’t any at all?

Yes. We do see that you have more of the capacity in the West that is stuck into these logistical issues, rather than what has been the case in the East, but it is within a number of percentage points. But mostly West, where the percentage is 3, 4 percentage points higher than the average of the feet that is in the East.

Okay. Thank you. That’s all from me.

But it is [Multiple Speakers] worldwide. Thank you.

All right. Thank you. And the next question comes from the line of George Berman from CL Securities. Please ask your question.

Hi, George.

Good morning, gentlemen. Thanks for taking – good morning. Thanks for taking my call. Congratulations on a great quarter.

Thank you very much, George. Happy to have you on.

Yes. I have got a quick question. You mentioned the switching of LR1s, LR2s from clean to dirty. And you mentioned a number of 50%, it maybe as many as 40 or 50 actual tankers. How much of a aggravation is it for these once they go to dirty to move back to clean product tankers?

Yes. So very good question, George. So as you point to – when you move from clean to dirty, that is actually just a decision and the vessel will be ready to go into that cargo program with the charter. When you want to move back, then generally, the requirement from charter is to have a vessel in the clean petroleum trade is that the cargo background, the last three cargoes that you have traded should be clean. And obviously, by definition, if your large cargo is crude, you have not had last three clean cargoes. So you need to find a way to come back and have a cargo background, where the charterer that you’re engaging with is willing to utilize your dirty cargo background, even though they are now going to be carrying a clean cargo. And the charterer normally takes the advantage of that to have a discount for that particular type of business. And here, how that will evolve for the ship owner will, of course, depend on the negotiation power at that day between the owner and the charterer. How much of a discount from the general market, are you willing to get to the charterer to induce them to use your vessels as number one, and what is the duration of that cargo transfer. So it really depends, I think, normally the rule of thumb in the marketplace has been $1 million sort of that you can apply of switching cost. But obviously, in the higher rate environment, it could be a higher contribution margin that you’ve given up potentially. But it is around that range in a normalized market.

Yes. So there is no actual cleaning of the dirty vessel involved? You just kind of diluted with three different voyages and hope that everything is clean then?

No. You do clean the vessel also the crew, and the vessel will clean its tanks, and the tanks will be inspected after carrying the crude.

Okay.

But the cargo background on paper, which last three cargoes cleaned. And obviously, you have cleaned the tanks, but you have not lost the cargo background on the last three cargoes.

I see. I see. So with major delays in various ports, various other things, I also noticed that your weights are far from what we are reading as being spot rates in the LR market, for example, of over $100,000, $150,000, that is just the fact that some of yours were on voyages engaged already will finish over the next few days or weeks, and then hopefully get the advantage of the newer rates?

Yes. You can see that we’ve also engaged in the charters that are slightly longer, let’s say, up to six months, where we have then engaged in freight rates for a longer period, which is not in the $100,000, but it’s probably only $50,000. But then we have it on the fourth quarter.

Okay. All right. I noticed that you had repurchased some common shares in the open market. Is there anyway for you to buy additional chunks of stock back maybe from one of your larger shareholders at the current depressed prices?

If you are asking, if there’s a possibility as such, it is. But as Jacob, alluded to earlier or described earlier, we have this – the dividend policy, where we decided on the dividend distribution every six months.

Okay.

So that is basically our policy and that is how we operate.

So you don’t generally buyback shares in the open market then?

No, not generally. We did – after the annual report 2019, we did buy some back, bringing us up to distribution of 50% of our net earnings. So that was the idea. But we are not doing it on a day-to-day basis, if that’s your question. We do it, when we evaluate our distribution policies.

Okay. Because basically what I’m alluding to is, if your stock price obviously does not reflect the realities of the current market or even of a future market one might argue here, it might behoove you or be more advantageous for shareholders, for you to buy back and retire X amount of shares, leaving more for the rest of us. And maybe if your largest shareholder has an appetite to sell shares, or whoever has appetite of selling shares, the company might buy those back rather than paying out the dividend. In turn, you obviously saved a dividend on the shares that you bought back?

Yes. It’s absolutely correct analysis. We are evaluating, as Kim mentioned on a semiannual basis, our distribution policy, and at that time we will evaluate, whether it – distribution should be in terms of dividend or share buyback or a combination.

I think there was a question on – written question also asking about, we have previously said that share buybacks is a second priority. And, of course, there is – I just want to – into – of course, there is also a free float issue. I know you’re addressing something else but, of course, liquidity is very important also. So that is a consideration also.

Okay. We’ll be watching for the future. Thanks very much and good luck to you all.

Thanks, George.

Thank you.

Thank you. There are no further question at this time. Please continue. All right. We do have one question. The operator is still getting the first and last name. Thank you.

Okay. Thank you.

Our next question comes from the line of [indiscernible] from Danske Bank. Please ask your question.

Yes. Hi, Jacob and Kim. Just a follow-up question on the question just before about the capital distribution. Of course, you’re generating a lot of cash at the moment as we can see, maybe up to 20% of market cap in the first two quarters this year. And two days ago, you said now that stock announcement saying that you’re moving $900 million from – to your free accounts and directly saying that this could be used for buybacks or dividends. And maybe you can shed some more light on this announcement?

Yes. There was a – perhaps an over interpretation in the short run, at least. But it is more of technical reasons to be able to distribute dividends from our PLC. So we are basically using the capital and allocated them to the free reserves to be able to distribute dividends and creating the flexibility we need. So that’s the idea that there were historically not enough distributable dividends. That is the case now going forward.

Okay. I think maybe last question is, so when looking at your NAV in this quarter, I was a bit surprised to see ship values decreasing from last year. I would have thought that in the best market in a decade, so we see ship value is actually increasing. Is nothing going on in the secondhand market?

I think things are going on in the secondhand market. But I think, in this instance, vessel valuations at the end of last year were little ahead of the curve, anticipating a stronger rate environment. And in a way sort of you had the peak of vessel valuations, at least, in this curve towards the valuations end of Q4. And therefore, you’ve seen this slight decrease in vessel valuations going into the year, even though we obviously have a very strong freight rate environment. There are transactions taking place also in the secondary market at around the prices, which is reflected in our NAV.

Okay. Thank you very much.

Thank you. There are no further question at this time. Please continue.

Okay. So thank you very much for all the input. There is one question on the webcast, which has to do with, whether our crews are increasingly stuck at sea due to COVID-19, and whether we foresee that it will be necessary to divert or have out of service to relieve our crews? And here, I think it’s an important question about having the safety and the – our crews at the forefront of our operation. And what we have experienced, so far, is obviously that there are delays in having the crew changes that we normally have. So a number of our seafarers have been out longer than what we had expected and that they had anticipated. We have been able to relieve some of them when we’ve been in the jurisdictions where that it has been possible. However, not to the same degree, as we would normally. So we are in a very close dialog with our crews on a daily basis around this. And at the same time, we are pushing in international forum via ICS, the agenda around that internationally, you have 1.2 million seafarers that more or less need to have crude change over time and that the current situation, where you have lockdowns and that you are restricted from doing normal crew changes is not sustainable. So I think it’s fair to say that we are pushing through their organizations and towards politicians and the individual nations to open up, and so we have a gradual normality for the good of our seafarers. We have had the crude changes and we do not anticipate that it will be necessary to take our vessels out of service to relieve our crews.

Okay. With that I think we conclude the earnings call for the first quarter of 2021 – 2020. Thank you very much for dialing in.

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.