Ladies and gentlemen, thank you for standing by and welcome to the TORM’s Q2 2020 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I must also advise you the conference is being recorded. And I would now like to hand your first speaker today, Morten Agdrup. Please go ahead.

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

Thank you, Morten and good afternoon and thank you all for dialing in. Please turn to Slide 4. Before we commence the review of our financial results, I would like to express my gratitude to all our seafarers, who made a great sacrifice during the troublesome period. As I will come back to later, the situation for our seafarers has improved over the past weeks, but they have, especially here in the second quarter of 2020 been the true foundation of TORM’s operations. As you know, the second quarter of 2020 was characterized by significant market volatility, with product tanker rates reaching all time high levels by the end of April, supported by temporary export boost and clothing stores. The strong market was the result of the COVID-19 outbreak with dramatically reduced oil demand, while the OPEC+ price war at the same time resulted in an increased oil production in March and into early April. However, here by the end of June, rates had come off as the oil market started to rebalance, resulting in a significant part of the tonnage in floating stores being released. I will go back into the details on the market shortly. But here for the second quarter, our product tanker rates fleet realized average TCE rates of $25,274 per day and for the first half the number was slightly lower at $24,465 per day. So here in the second quarter of 2020, we realized a profit before tax of $71 million and it was $128 million for the first half. Our return on invested capital or ROIC was 18.5%, earnings per share 96% for the quarter, and for the first half, the number were 17.1% in return on invested capital and earnings of 1.71 per share in Danish kroner earnings per share for the…

Thank you, Jacob. Please turn to Page 16. With our spot-based profile, TORM has significant leverage to increases in the underlying product tanker rates. As of 13 of June 2020, every $1,000 increase in the average daily TCE rate achieved translates into an increase in EBITDA of around $11 million in 2020. The corresponding figure increased to $26 million in 2021, $27 million in 2022. As of 13th of August 2020, the coverage for the third quarter of 2020 was 68% at $17,928 per day. Please turn to Page 17. Before discussing 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 party transactions. Naturally, we are focused on maintaining efficient operations and providing a high-quality service to our customers. Despite the trade-off we have a seen a gradual decrease of more than 20% in our OpEx per day over the last 6 years, which translates into a total decrease of around $44 million on an annual basis. OpEx was below $6,100 per day in the second quarter of 2020, which we find competitive in light of our fleet composition. The recent OpEx per day development is partly a result of delays in crew changes and planned maintenance due to the COVID-19. Slide 18, please. I would now like to discuss our financial position in terms of key metrics such as net asset value and long-term value. Vessel values have decreased by around 5% during the second quarter of 2020 and the value of TORM’s vessels, including new buildings was around $1.7 billion as of 13 June 2020. Outstanding gross…

Thank you. [Operator Instructions] Our first question comes from Jonathan Chappell from Evercore. Please go ahead.

Thank you. Good afternoon, everybody.

Good morning, Jonathan.

For either one of you, the 50% payout ratio I know that’s within your range, but maybe a bit of a pleasant surprise just given the uncertainty in the market and maybe the choppier near-term outlook. Given that the next semiannual dividend is several, several months away, can you talk about your capital allocation plans for the next couple of months? The third quarter bookings are pretty decent, so you should still be very cash flow positive and with the limited debt amortization, how are you thinking about use of capital as we get to the end of this year and into early next year?

Yes, thanks for that, Jon, Jacob here. So, what we are looking at now is that we have – as you point to, we have delivered a strong set of numbers for the first half. We will be distributing half of this by virtue of the dividend being paid out the rest is obviously available to the company. At the same time, we have released further financial finances by selling off our 10% of our fleet in the vessel sales here since our last call and our last release. So that put us through that the capital allocation we are thinking of on top of the distribution it is really to take advantage of potentially as you point to a choppier market where rates are lower than what we experienced in the first half so far and where we also see that there could be potential opportunities to take on new capacity on to the platform at attractive prices. So, I think that will be at least in the immediate future that will be our focus area.

Okay. And then just as a follow-up just if we tie all your slides together, very limited CapEx commitments, but it’s covered by financing somewhat de minimis debt amortization over the next several years, market outperformance. And you are one of the few companies that actually publicly provides an NAV, I have to think at some point with your dividend distribution with all the other positive things I have already mentioned, this discount starts to become perpetual frustration. So, you could just speak maybe a little bit strategically about how you feel about the discount to this NAV and what plans you may have to hope to narrow it?

Yes, I can – I have to confess, Jon, that, that is absolutely also a frustration on our side. I think it is unfortunately not a company-specific thing. It does look as if the broader markets in terms of shipping stocks, but also specifically, when we look at the product tanker space that the discount to NAV is generally across the sector and names is quite high also from a historical perspective right now. And I think it is going to be hard work on our side to continue to demonstrate that we are actually, as you point to a superior platform that delivers the highest return on invested capital in the industry quarter after quarter and that we at the same time, are distributing when times are like this as we are giving back to our shareholders. Of course, it’s a balancing act as we all know about being prudent about our own capital structure. And on the other side rewarding the shareholders when the time is, but I think that is – that’s what we can do. And then I see it as a broader theme that investors in general have been probably a little scared about the consequences for transportation and energy stocks of the COVID-19. And I must admit that if I take a step back and think about how I felt about this just sort of before the summon back in June, I was probably more nervous than what our figures have shown us so far. We are going to be delivering a positive result also for the third quarter. And that is not necessarily the way I felt about how the world would evolve only a couple of months ago.

Yes, that makes sense. Thanks for your thoughts as usual, Jacob.

Thank you.

And your next question comes from Ulrik Bak from SEB. Please go ahead.

Yes, hi, Jacob, hi, Kim. Also, a few questions from my side. The latest data points point as you mentioned, both at shore, but also as floating storage, which I suppose will affect rates for some time. Can you please provide an update of the current market from your perspective and what dynamics are at play at the moment and if the market balance will improve from here or get worse before it gets better? And also if you can shed some light on when you expect inventory levels to be back at normal levels? Thank you.

Thank you. That is a very good question. I think just taking a step back, inventories have peaked whether it’s floating or onshore then they did peak here floating stores probably back in May and for onshore inventories in the key trading hubs probably back in June. So, we are going to have to live with that there is going to be a period here of de-stocking. I am actually – you can say I have been positively surprised about how fast the de-stocking and rebalancing of the vessels in floating stores have actually taken place. Yes, we do have let’s say around 6% of the clean trading vessels in floating stores, the normal level is around 4%. So you can say, this difference of around 2% is of course something we will have to work ourselves through, but it is not a big number. It’s not a 10% or 15% number that we are looking at. And the fact that the global economy is today, I think drifting towards a trajectory that is positive. Of course there can be setbacks, either very local or in countries around the world where the COVID-19 will affect demand, but I think to-date as a global community, we are better placed to handle the COVID-19 positive negatives sort of from an economic point of view today than what we were back in March. So, I expect that from here we have had a deep caught in demand and there has been a buildup of storage onshore and on our – all type of vessels. However, from where we go from here, I do see it as a positive territory in terms of underlying demand and there will be volatility around it. So, I think my best estimate is that yes, there will be a period here where we have to brace ourselves for that, that there is a lot of uncertainty. But coming back to if I look at the Q3 bookings we have done so far, they are actually at a decent level. Our PBT breakeven for the quarter is around 15. These rates are in the vicinity of around 18, if this is the big storm for TORM, I am very, very pleased obviously.

Okay, thank you. That makes sense. Then second question is to the sale of your vessels you have sold now 7 vessels in a relatively short period of time and you mentioned that you thought the timing was right and it’s part of your natural evolvement and to bring on younger tarnish or decrease the age of your vessels, but do you see yourself selling further vessels or are you more in the market for buying younger second-hand vessels?

It really depends on the vessel pricing the ultimate cover in our industry. We often talk about so what have you been, call it going forward when you have sold seven vessels in our case, we have actually taken 10% ultimate cover for those vessels that are of our equation. And we are willing obviously we have the capacity on our platform. And we also have the financial flexibility to go out and potentially acquire tonnage when we deem that the price points are right so, I think we will leave it up to the market will dictate what we see as the right move, but I would expect that prices will have softened in this environment where rates more choppy, and where volatility is higher than the order underlying asset prices is that there will be opportunities to buy. But of course, if we are wrong and the markets proved to be behave differently, and vessel prices go north, then we are also willing to sell, but it was a good timing for us, where demand was strong and where the buyers were willing to transact at or above our broker values for tonnage that from time to time can be where you kind of experience in that it can be difficult to sell more than one ship that we transacted seven, or a relatively short period is something that we saw strategically yes as a very good opportunity.

Okay, thank you. And then my final question to your dividend payments, very sizable dividend payment of 50% of your biannual net income. Can you please elaborate on what made you to distribute 50% and if you consider doing share buybacks, given that the shares trading at a discount to NAV?

Yes, absolutely. So, as we point to we look at this on a semi annual basis. We have a distribution policy in place for the past 5 years where we distribute between 25% and 50%. And currently with the strength of our performance, then to go to 50% was actually very natural because we have room in our sort of balance sheet in our structure, both in terms of where our net LTV is, which is right in the sweet spot of where we think we should be at the current point of the cycle, and also the availability of cash. So it’s very natural for us to be distributing 50% at this where the company is so strong going into this first half, we already had a balance sheet that was wrong. Now we have one that is even stronger than what we had before even after having distributed if you then come to the point around whether you should be distributing as a dividend or with a share buyback yes, absolutely. We have evaluated and what we have seen we have on a number of times actually done share repurchases, sort of serve as part of this is not had a meaningful effect. And we are getting to a stage where we think that the free float in our shares is trumping the opportunity for us to go in and narrow the gap on NAV. And obviously, the shareholders we have would think that it would be beneficial to have more TORM shares can absolutely go and use the proceeds here and utilize them against buying off stock in their own right.

Okay, that makes perfect sense. Thank you. I have no further questions.

Thanks a lot

Thank you. And your next question from the phone comes from Espen Landmark from Fearnley. Please go ahead.

Hi, guys. Interesting slide, I guess always, I am looking at Page 8, maybe one shouldn’t get too smart about this, but I think by many metrics it seems with both more product inventories than crude during this pandemic, I mean, as you said refiners haven’t been able to match the utilization with a demand loss. I think most agencies have, crude balances reverting back to average levels by yearend I mean, do you anticipate the seven trend on the product side or is it more of a ‘21 event given the relatively large portion of a product being built there?

Yes. So, I really think it depends on the development in the global economy, because ultimately, obviously, the refined products had to have an end-user which is one of us so to say. So the choppy road ahead of us on the recovery track for some normalization in utilization of the various refined products will dictate where we end on your questions. But if we look at Slide 10 in the deck, I would say that it is somewhat comfortable that we to-date we look at the CP inventories in key trading are already trending down and that it doesn’t take that much to come into it where we have been in a situation back in 2015 where we had to be very patient over several years before inventories really came back to the 5-year average. I don’t think it will take as long, but whether we will look at it by year end or early 2021 I think it’s too early to tell. It really depends on the COVID-19 development. It depends on how the global economy fares and absorbs that. But I think as I tried to describe also in the voice over here of the slides is that it is quite encouraging that we are already now at this juncture eating into inventories, whether it’s floating or whether it’s onshore, because that’s of course, that can be quite painful to come back to a normalized supply demand picture for the trade, but I see it as positive that we have not built up more and that we are already engaging in this rebalancing of the inventories.

Okay, that’s helpful. I know it’s a difficult question. Maybe – maybe it’s been on the sideline, but the refinery industry obviously in a pretty dire state at the moment, I think it’s been even underutilized even before the COVID-19. So you said your refining closures potentially has a positive impact in terms of the ton miles, I guess we can see that. But do you think there is other implications from a ship-owner perspective of that industry being more consolidated?

So, we think of other negative consequences and then I would argue no, there is still – it is still a relatively fragmented industry as such when you look at it. I don’t think that the fact that you will have consolidation will necessarily lead to that you have less demand for transportation. So, I don’t see that. I really see that the areas where you are closing down either where you have already decided to permanently shutdown or where closure is under consideration, that is in areas where you will be needing to import refined products into it. It is U.S. West Coast. It is Japan. It is South Africa Taser [ph] and these areas will not be able even though that would be refinery consultation in the industry as a whole, there is still going to be a gap between local production and then the underlying demand in those areas when and if there is refinery closures.

Alright, perfect. Thank you.

Thank you. And we have no further questions from the phone at the moment.

Okay. The questions from the web, I believe we have – there was a couple, but I believe we have answered those in the Q&A session. So with that, I would like to thank you all for dialing in. And with that, we will end the call here of our second quarter. Thank you. Bye.

Thank you. That does conclude our conference. Thank you for dialing in. You may now disconnect.