TORM plc (TRMD) Earnings

Management highlights

- Core Competitive Advantage - TORM holds a quantifiable "one-term advantage" over peers, enabled by years of development of an agile operating model and centralized decision-making platform. Over three years, the MR fleet generated US$200 million more TCE revenue than the peer average, driven by higher vessel utilization, disciplined cost control, and strong commercial execution. - The company is positioned to outperform in volatile, inefficient tanker markets created by geopolitical uncertainty, which the firm frames as a source of opportunity rather than only risk. - Fleet Operations and Update - Safety is the company's highest operational priority. One vessel is currently stranded inside the Persian Gulf following the Strait of Hormuz closure, but the crew is safe, has adequate provisions, and morale remains high. Bunker prices have risen but supply availability remains secure. - TORM continued active fleet renewal in Q1 2026: after quarter-end, the company agreed to acquire six MR resale vessels, with four expected for delivery in 2027 and two in 2028. As of quarter-end, TORM operated 95 vessels; after all announced transactions are completed, the total fleet will grow to 103 vessels on a fully delivered basis. The acquisitions improve fleet flexibility and earnings capacity while maintaining a prudent risk profile. - Market Context - Product tanker markets entered 2026 with rates stabilized well above historical averages, supported by momentum in the crude tanker market, increased use of compliant non-sanctioned vessels, and ownership consolidation in the VOCC segment. The late-February outbreak of conflict and subsequent closure of the Strait of Hormuz drove an unprecedented sharp increase in tanker rates, with Q2 average bookings to date exceeding US$70,000 per day across all vessel sizes. - The Strait of Hormuz closure disrupted approximately 20% of global daily oil consumption, and only a fraction of lost volumes have been replaced to date. Over 200 vessels are stranded inside the Persian Gulf, representing ~3% of the global product tanker fleet and ~6% of the crewed fleet, creating major vessel dislocation, higher ballast ratios, and systemic market inefficiencies. Even before the closure, widespread sanctions on Afromax and LR2 vessels (one in four vessels in this combined segment is currently sanctioned) had reduced effective clean product trading capacity by 4% since early 2025, even as nominal fleet capacity grew 8%. - Management frames current conditions as a structural market reset, not a temporary shock. Even after the Strait of Hormuz reopens, sustained tonnage dislocation and inventory rebuilding will support ongoing market strength, benefiting agile operators like TORM. - Balance Sheet and Capital Returns - Average broker valuations for TORM's fleet rose 9.7% in Q1 2026 to US$3.6 billion, pushing net asset value to US$3.1 billion. The company holds net debt of US$894 million, equal to a net loan-to-value ratio of 25.1%, maintaining a conservative, flexible balance sheet with well-distributed debt maturities (only US$287 million matures in the next 12 months). - The board declared a dividend of US$0.70 per share, for a payout ratio of 58%. Absent temporary Q1 net working capital buildup from rising rates and bunker prices, the payout ratio would have been 80-85%, aligned with the company's historical capital return framework.

Guidance

- Management upgraded full-year 2026 guidance significantly from the prior range. TCE is now guided to US$1.15 billion to 1.45 billion, up from the previous range of US$850 million to 1.25 billion. - EBITDA guidance was also upgraded to US$800 million to 1.1 billion, up from the prior range of US$500 million to 900 million. - The guidance upgrade reflects two core factors: the stronger-than-expected Q1 2026 earnings performance, and the very high near-term earnings visibility for Q2 2026: 57% of Q2 earning days are already secured at a fleet-wide average TCE of US$71,494 per day, an unprecedented level for the product tanker market. - Updated guidance uses the forward derivatives market as a reference for uncovered days, and remains subject to volatility from geopolitical developments, changes in trade patterns, and overall market conditions moving into the second half of 2026.

Segment performance

For Q1 2026, TORM delivered total Time Charter Equivalent (TCE) revenue of US$286 million, with a fleet-wide average TCE of US$34,937 per day. Breakdown by vessel segment: 1. LR2 segment: average TCE earnings exceeded US$41,000 per day, contributing ~40% of total TCE revenue based on fleet composition. 2. MR segment: average TCE earnings came in just under US$33,000 per day, contributing ~52% of total TCE revenue as the largest segment of TORM's fleet. 3. LR1 segment: average TCE earnings were around US$35,000 per day, contributing ~8% of total TCE revenue. Overall, the firm reported EBITDA of US$201 million (later corrected to US$211 million, the strongest quarterly result since Q2 2024) and net profit of US$122 million, equal to earnings per share of US$1.21.

Risks & headwinds

- The duration of the Strait of Hormuz closure remains highly uncertain, with transits still more than 95% below pre-conflict levels. Persistent closure or delayed reopening creates ongoing uncertainty for global energy trade flows and market stability. - Even after the Strait of Hormuz reopens, sustained tonnage dislocation and market rebalancing will create elevated volatility across the tanker sector. - Ongoing geopolitical instability and expanding sanctions regimes create growing market complexity and friction, which can lead to unexpected operational disruptions. - 60% of the currently sanctioned vessel fleet is over 20 years old, so even if sanctions are lifted in the future, these vessels are unlikely to return to mainstream clean product trading, locking in some structural capacity reduction but also creating ongoing market uncertainty. - Tanker rates are inherently volatile, and current elevated rates may not persist, with guidance already noting the risk of market shifts through the second half of 2026.

Analyst Q&A

• Q: The reported Q1 2026 dividend payout ratio is 58%, which is much lower than the historical 80-85% range. Is this lower ratio a new permanent policy, or tied to temporary factors, and will working capital reverse in coming quarters?

  A: The lower payout ratio is driven entirely by a temporary US$30 million net working capital buildup in Q1. This buildup came from two timing effects: 45-50 day freight receivables for late-March rate fixings that will not settle until Q2, and higher inventory values from rising bunker prices. It has no connection to the recent MR resale acquisitions. If rates stabilize, the working capital will be released in Q2, and the payout ratio will return to the 80-85% historical range; if rates rise further, additional working capital will build, and if rates fall, more working capital will be released.

• Q: TORM recently acquired six new MR resales, but did not offset this growth with matching sales of older vessels. Do you plan to sell older tonnage, or are you choosing to maintain full market exposure, and is secondhand market liquidity still strong for older assets?

  A: Secondhand market liquidity for older vessels remains robust. The decision not to offset the new acquisitions with immediate older vessel sales is driven by valuation and balance sheet strength: TORM's balance sheet is in pristine condition, and the company calculated that keeping existing older assets provides higher net present value than selling them given the strong current and projected rate environment. Management expects continued market volatility, which creates earning opportunities for all vessel age profiles, so the company retains existing assets to maximize optionality.

• Q: What drove the decision to acquire six MR resale vessels instead of buying existing tonnage or signing new building contracts? What return criteria were used?

  A: The decision was based on comparing the three available investment options: existing vessels on the water, resales, and new shipyard contracts. Management found that the pricing and delivery timeline of these resales was more attractive than the alternatives: existing secondhand vessel prices have risen recently, and new contracts have much longer delivery timelines, while these resales offer earlier delivery at pricing that meets the company's risk-adjusted return hurdles. The acquisition targets modern, high-quality vessels that will be attractive to customers and deliver strong returns for shareholders over time.

• Q: After the sharp Q2 rate increase, rates have pulled back recently. What is your outlook for near-term rate development given ongoing trade flow adjustments post-Strait of Hormuz closure?

  A: Recent rate softening reflects a temporary pause: after the Strait closed, Asian buyers rushed to secure replacement product cargoes from the Western Hemisphere, opening large arbitrage margins that pushed rates higher. Currently, end-users are pausing purchases to wait and see if the Strait will reopen, which has compressed arbitrage margins and reduced trading volumes. This balanced pause is not a long-term trend: either the Strait will reopen, restoring large trade volumes through the waterway, or it will remain closed, and demand for Western Hemisphere cargoes to Asia will rebound, pushing rates higher again. One of these two scenarios is the most likely near-term outcome.