Ladies and gentlemen, thank you for standing by and welcome to the TORM’s Q3 2020 Results Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I must also advise you that this conference is being recorded today and I'd now like to hand the conference over to your speaker, Morten Agdrup. Please go ahead, sir.

Thank you and thank you all for dialing in to TORM’s conference call regarding the results of the third quarter and first nine months of 2020. My name is Morten Agdrup and I am Head of Corporate Finance and Strategy at 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, please. Before commencing, I'd like to draw your attention to our Safe Harbor statement. Slide 3. With me today, I have Executive Director and CEO, Jacob Meldgaard and CFO, Kim Balle. I will now hand the call over to Jacob.

Thank you, Morten and please turn to Slide 4. A warm welcome and good afternoon. Thank you to all for dialing in. Here today before we commence the review of our financial results, I'd like to express my gratitude to our seafarers. They are the foundation for TORM's operations and while the restrictions on crew change have decreased all over the world, they continue to make great sacrifices during this trouble period. Today also special gratitude goes to the crew on board to TORM ALEXANDRA that over the weekend were attacked by pirates in the Gulf of Kenya but due to their excellent seamanship and the excellent support from the Italian Navy, they managed to stay safe and in control of the situation. Turning now to the oil product tanker market, the freight rates here in the third quarter of 2020 have come down from what you consume unprecedented high levels during the second quarter, primarily impacted by the unwinding of floating and stores. The [indiscernible] was also characterized by record high regional rate disparity with the West market being significantly stronger than the East due to record low vessel availability in the Western Hemisphere. I'll go into details on the market shortly. Now for the third quarter, the product tanker fleet realized an average TCE of $16,762 a day and here for the first nine months of 2020 the crew number was $21,942 per day. Looking at probably vortex [ph] here in the third quarter of 2020 we realized profit of before tax of $1 million with the number being $129 million for the first nine months of the year. The number is negatively impacted by a nonrecurring highest and a provision of $8 million related to bookings [ph]. Our return on invested capital, our earnings per share was…

Thank you, Jacob. Please turn to Slide 15 the large base profile has significant leverage to increase its underlying product tanker rates. As of September 30, 2020, every $1,000 increase in the average daily TCE rate achieved, translates into an increase in EBITDA of around $4 million in 2020. The corresponding figures increased to $23 million in 2021, and $26 million in 2022. As of 8 November, the coverage for the fourth quarter of 2020 was 66% at $13,274 per day. Slide 16, please. Before reviewing our cost structure and financial position, I would like to remind you of TORM's operating model, where we operate a fully integrated commercial and technical platform, which we believe is a significant competitive advantage for TORM. Importantly, it also provides a transparent cost structure for our shareholders and eliminates related pilot transactions. Naturally, we are focused on maintaining efficient operations and providing a high-quality service to our customers. Despite this trade off, we have seen a gradual decrease of 18% in our OpEx per day over the last 6 years, which translates into a total decrease of around $36 million on an annual basis. OpEx was around $6,700 per day for the third quarter, reflecting an increase of around $700 per day compared to the second quarter. This increase is primarily a result of a very positive development TORM has experienced with respect to crew changes. During the third quarter, TORM performed just below 1,000 crew changes or around two-thirds of our total crew on board our business. This has reduced the number of crew with overdue employment contracts to a current level of around 6%, down from approximately 40% at the peak during the second quarter. TORM is still experiencing increased costs related to crew changes as a result of precautionary measures such…

[Operator Instructions] And your first question comes from the line of Ulrik Bak of SEB. Please go ahead.

A few questions from my side. Firstly, we've now been witnessing quite depressed rate for some time. And usually, rates, they start to climb during Q4 as the winter season kicks in. Do you expect this to happen this year despite the high inventory levels and the new corona restrictions? And if so, when do you think will be the inflection point?

Yes. Thanks for that question, Ulrik. And actually, we did have the same dialogue at our last conference call back in August after our Q2 release, where we were careful in saying that we thought that this year, probably the seasonality in the freight rate environment would be subdued. That's unfortunately, still, our take on this, my instinct from the traits we see with our customers is that it is - activity is not as strong as it normally is that this - it doesn't mean that we cannot climb from the current relatively weak freight rates, that could be some volatility, but to expect a big shop increase in freight rates, I think that will coincide with the rollout as already discussed, of a vaccine globally so that we get a consumer pattern that is more like the one we had pre COVID-19.

Then my second question is on your vessel transactions during Q4. You have acquired two 2010 build MRs for $32.6 million. How does that value compare to the price you received on the vessels you sold earlier this year if they are comparable in any way?

Yes. So that's a good question. They are not directly comparable since the vintage of the ones we've sold is around 2002, 2003 bills. But if you look at the price curve of five year old, that was also part of the - some of the material we have. You will see that prices of vessels have gone down in the secondary market over the last 6 months, even though they are then not comparative of the same, we have sold previously at prices that would translate into higher prices than what we are acquiring at today, but they are not the same vintage.

Okay. But it's fair to assume that the price, if you had bought the same MR's 6 months ago, the prices would be much different?

Significantly above, yes.

Your next question comes from the line of Jon Chappell of Evercore. Please go ahead.

I wanted to ask about the MRs in a different way. So 10-year-old vintage, I'm sure you got a very attractive price for those. But with all this focus recently on carbon emissions and new fuel propulsion. What was the thought process behind buying ships that will eventually - essentially be 11 years old in the next couple of months. Was that strictly an opportunistic buy and - but not really a strategic focus going forward?

Yes. No. So I think we - the way we look upon this is that an acquisition of an asset should of course, fit with the economic logic as you point to, where - what is the sweet spot on return on invested capital over the coming years. That's one criteria. The second criteria is that it does fit with our CO2 emissions ambition around, ultimately, by 2030, to have a 40% relatively lower CO2 emission on our fleet. And this particular vessel - sister to some of the others we have where we can see that some of the retrofits we can apply actually means that these vessels will sort of on a relative basis, provide an even better performance on emissions than what we had without the vessels. We don't see them as a long-term part of our fleet. As you will have seen the average age of the vessels that we are sort of recycling and going out of our fleet have a vintage of around 18 years. So before 2030, likelihood is that these vessels will not be part of it. But in the meantime, we actually think that they fit these two criteria strategically to be a good risk for the CapEx that would be employed. And number two, that they are actually meeting the CO2 emissions crusher. That's the way we will think about this investment and also any future moves that we will be taking.

Okay. And as it relates to future moves, I mean, that slide you put on the refinery closures and the new expansion. Obviously, a theme we've all been talking about for about 15 years now, but finally seems to be coming to fruition. Should we expect the see more LR, two LR1 investments as you think about your fleet over the next 5 years or so as opposed to your core MRs to kind of meet that lengthening of haul dynamic that should be hopefully occurring?

Yes, I think you are right to point to that the longer haul trade would qualify for the customer demand will increasingly also move more towards long rate vessels. And I think we generally subscribe to that, that in the latter part of this decade that there could be a tendency to favoring larger vessels over smaller distribution vessels.

Okay. And then if I may, just two kind of nitpicky questions. I'm trying to understand the stock price reaction today, which doesn't seem to quite align with the results in the presentation. So first of all, the $8 million of cargo claims in the third quarter, which I think would obviously be considered nonrecurring, but may not be treated as such right now. Can you just explain what that is? And is that an issue going forward? Or does it really ring-fence to the third quarter?

Yes, absolutely. So it is a number of card claims that we have accounted for, where it is in dispute, whether we will actually ultimately be picking up the sort of the obligation to pay this or not, and it is ring-fenced to these particular events and the nonrecurring item.

Okay. And then the second thing is, you obviously paid an $0.85 dividend almost 2 months ago to the day. But in the presentation, it says, in line with your dividend policy, no dividends will be recommended by the Board for the 9 months ended September 30. So I want to be clear. I mean, the dividend policy is still 25% to 50%, and the no dividend based on the 9 months, and you already paid $0.85. So you're effectively just saying based off the third quarter results, there's no recommendation from the Board. Is that correct?

That is correct. John, let me qualify that, that our distribution policy is to evaluate semi annually based on the net result to distribute so that is either dividend or share buyback, 25% to 50% of net. So actually, it was not even on the Board agenda to be discussed because that would be done at year-end, where the second half of the year results will then be taking into account.

But you're right. I think I might have been a little bit misleading and may explain some of the actions to that. But anyway, that’s all I had. Thank you, Jacob.

Your next question comes from the line of Anders Karlsen of Danske Bank. Please go ahead.

So a lot of my questions have been asked already, but I was thinking about scrapping. We haven't seen any big scrapping moves given the weak rate environment. Are you hearing? Or are you seeing any signs that, that is about to change?

Yes. Good question as well. The fleet and the percentage of the fleet that are going for scrap has not really changed over the past 12 months. You could say that what would lead that to materially be different would be some kind of regulation, either on the features of vessels and/or on a carbon tax that could potentially lead to accelerated scrapping. But when we look at the vintage of product tankers, our opinion so far is that there will not be an acceleration necessarily of scrapping within the next couple of years. But when we come to the second half of this decade, so 2025 onward, then when you look at the pool of potential vessels that are meeting the current average age for scrapping is 25. That pool of vessels will significantly increase as we move into the second half of this decade.

And the second question is relating to your scrubbers. I mean, it's a little bit of a history that was done last year, but you still continue to install coverage on some ownerships and have a fair number of scopes. What is your experience so far? And could you quantify a little bit about the savings that we have seen, albeit the Banco differentials are fairly low. But can you quantify anything about your savings so far?

Yes. So what we can say is, A), that operationally, we are experiencing no sort of operational issues with the scrubbers itself. On the other side of the equation, the economic return, then we are looking at payback time depending on the size of vessel and depending on the - whether it is a retrofit or whether it comes from newbuild, it is generally a payback time of around 5 years for our total installed scrubber fleet.

Okay. Are you seeing any high end maintenance cost? Or is it as expected?

Yes. So back to my point that, I think on everything that we sort of - we under our control, you can say, operationally around the retrofit itself around the subsequent operation of the scrubber. There's been no surprise that it is in line with what we had expected. And we are very pleased with that operational sort of performance that we see. And when we then look at the financial return of the scrubber, then it is with the current spread profile that we are experiencing and the forward curve, it is payback times around 5 years.

And your next question comes from the line of Climent Molins of Value Investor's Edge. Please go ahead.

You've talked about the current differences between East and West. And I was wondering if you could provide some more color on what you're seeing in the market as of now? Are lockdowns in Europe already having an effect?

Thanks for that question. So what we are experiencing is that currently, freight rates in the Western Hemisphere are slightly stronger for MR than what we are experiencing in the Eastern Hemisphere. But it is not to the same degree as what we saw only a couple of months ago. So the impact has been there lower demand for transportation in the Western Hemisphere leading to lower freight rates, albeit that they are still somewhat above what we are experiencing in the East. So to be very precise, the freight rate environment in the East is around, let's say, for an MR., $7,000, $8,000 per day, and it's probably around 10,000 in the West.

And I was surprised by your Q4 coverage for the Handymax class. And I was wondering if you could provide some comments. I mean, I know you have only 2 vessels. So…

Could you elaborate your question?

Yes. Sorry. I was wondering if you could provide some comments over your Handymax performance for Q4.

I think the rate that we have there is close to what is on the MRs, but it's for a very small portion. As you point to, it is rather position when we only have 2 units. So I think at the end of the day, over time, our freight rates will average out over several quarters, whereas if you have a bigger pool of vessels, like, for instance, what we have in MRs, you will see that averaging up taking place within the quarter itself. So I think it's just a coincidence.

There are no further questions from the telephone lines.

Okay. We have two questions from the web. One question relates to the benefits of our public listing. Kim, would you elaborate on that?

Yes, I can take that one. Being listed has that several advantages. But the primary advantage is, of course, the ability - the opportunity to raise equity to raise capital in a public market. So that is one of the primary function. And secondly, it also provides the opportunity to issue new shares as a currency when making M&A transactions. And on top of that, being listed requires an extreme sense of transparency, a high degree of communication and extremely strong governance and hence, also a strong control framework. So when you add all that up, in the end, that will give an insurance for all stakeholders broadly that we are living up to an utmost effort on all these accounts. So I think both are extremely valuable by being a listed company. So no, we have no intention as such of delisting our company. We are very happy to be listed.

Thank you. And we have a second and last question around our view on M&A and consolidation. Jacob, would you elaborate?

Yes, please. Well, we're always open for the dialogue. I will say what we would be looking for is, obviously, that there is a commercial fit with a partner. We would be looking that to whether it creates additional value to our shareholders. And if these themes are in line, we are always open for discussions.

Okay. Thank you.

There are no further questions from the web. So this concludes the earnings conference. Thank you all for dialing in. Have a good day.

Thank you, sir. Ladies and gentlemen, that does conclude your webcast for today. Thank you for participating, and you may now all disconnect.